The transfer is made on January 1, 2009, when the equipment has a 10-year remaining life. Able originally acquired the equipment for $100,000 several years ago since that time, it has recorded $40,000 in accumulated depreciation. To examine the consolidation procedures required by the intercompany transfer of a depreciable asset, assume that Able Company sells equipment to Baker Company at the current market value of $90,000. Depreciable Asset Transfers Illustrated : In fact, over the life of the asset, the depreciation process eliminates all effects of the transfer from both the asset balance and the Retained Earnings account. From a consolidated perspective, the extra expense gradually offsets the unrealized gain within this equity account. This depreciation is then closed annually into Retained Earnings. For the buyer, excess expense results each year because the computation is based on the inflated transfer cost.
The depreciation systematically eliminates the unrealized gain not only from the asset account but also from Retained Earnings. Recognition of this expense reduces the asset’s book value every year and hence, the overvaluation within that balance. In contrast, transferred land is quite often never resold thus permanently deferring the recognition of the intercompany profit.įor depreciable asset transfers, the ultimate realization of the gain normally occurs in a different manner the property’s use within the buyer’s operations is reflected through depreciation. For inventory sales, the culminating disposal normally occurs currently or in the year following the transfer. More specifically, accountants defer gains created by these transfers until such time as the subsequent use or resale of the asset consummates the original transaction. When faced with intercompany sales of depreciable assets, the accountant’s basic objective remains unchanged: to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated statements. However, the subsequent calculation of depreciation or amortization provides an added challenge in the development of consolidated statements. Accounting for these transactions resembles that demonstrated for land sales. Equipment, patents, franchises, buildings, and other long-lived assets can be involved. Just as related parties can transfer land the intercompany sale of a host of other assets is possible.