Question

Downstream Intercompany Equipment Transactions On July 1, 2018, Pearl Industries sold

administrative equipment with a book value of $1,000,000 to its subsidiary, Shiek Shoes, for $800,000.

At the date of sale, the equipment had a remaining life of five years. It is being straight-line depreciated

on Shiek’s books. It is now December 31, 2020, the end of the accounting year, and you are preparing the

working paper to consolidate the trial balances of Pearl and Shiek. Shiek still owns the equipment.

Required

a. Prepare the required eliminating entries for this intercompany equipment sale for the December 31,

2020, consolidation working paper.

b. It is now December 31, 2021. Prepare the required eliminating entries for this intercompany equip‑

ment transaction for the December 31, 2021 consolidation working paper.

c. Now assume that Shiek sells the equipment to an outside party for $400,000 on January 1, 2022.

What is the consolidated gain on the sale of equipment? What is the gain reported by Shiek? Prepare

the required eliminating entries for the December 31, 2022 consolidation working paper

Answer 1

Part 1

General journal	debit	credit
Investment in Shiek (100000-((100000/5)*1.5)	70000
Equipment, net		70000
To eliminate the beginning-of-year unconfirmed gain
Equipment, net (100000/5)	20000
Depreciation expense		20000
To eliminate the excess depreciation recorded by Shiek

Part B

General journal	debit	credit
Investment in Shiek (100000-((100000/5)*2.5)	50000
Equipment, net		50000
To eliminate the beginning-of-year unconfirmed gain
Equipment, net (100000/5)	20000
Depreciation expense		20000
To eliminate the excess depreciation recorded by Shiek

Part C

General journal	debit	credit
Investment in Shiek (100000-((100000/5)*3.5)	30000
Equipment, net		30000