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Downstream Intercompany Equipment Transactions

On July 1, 2015, Pearl Industries sold administrative equipment with a book value of $360,000 to its subsidiary, Shiek Shoes, for $420,000. At the date of sale, the equipment had a remaining life of five years. It is being straight-line depreciated on Shieks books. It is now December 31, 2017, 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 necessary consolidation eliminating entries at December 31, 2017.

Consolidation Journal
Description	Debit	Credit
AnswerEquipment, netInvestment in ShiekDepreciation expenseEquity in net income of ShiekGain on sale of equipment	Answer	Answer
AnswerEquipment, netEquity in net income of ShiekInvestment in ShiekDepreciation expenseGain on sale of equipment	Answer	Answer
To eliminate unconfirmed gain on intercompany transfer of equipment.
AnswerInvestment in ShiekGain on sale of equipmentDepreciation expenseEquipment, netEquity in net income of Shiek	Answer	Answer
AnswerInvestment in ShiekEquipment, netEquity in net income of ShiekDepreciation expenseGain on sale of equipment	Answer	Answer
To eliminate excess depreciation expense.

(b) It is now December 31, 2018. Prepare the required eliminating entries for this intercompany equipment transaction for the December 31, 2018, consolidation working paper.

Consolidation Journal
Description	Debit	Credit
AnswerEquity in net income of ShiekDepreciation expenseInvestment in ShiekEquipment, netGain on sale of equipment	Answer	Answer
AnswerGain on sale of equipmentEquipment, netEquity in net income of ShiekInvestment in ShiekDepreciation expense	Answer	Answer
To eliminate unconfirmed gain on intercompany transfer of equipment.
AnswerDepreciation expenseGain on sale of equipmentEquity in net income of ShiekEquipment, netInvestment in Shiek	Answer	Answer
AnswerEquity in net income of ShiekGain on sale of equipmentDepreciation expenseEquipment, netInvestment in Shiek	Answer	Answer
To eliminate excess depreciation expense.

(c) Now assume that Shiek sells the equipment to an outside party for $300,000 on January 1, 2019. Prepare the required eliminating entries for the December 31, 2019, consolidation working paper.

Consolidation Journal
Description	Debit	Credit
AnswerEquity in net income of ShiekInvestment in ShiekGain on sale of equipmentDepreciation expenseEquipment, net	Answer	Answer
AnswerDepreciation expenseInvestment in ShiekEquity in net income of ShiekGain on sale of equipmentEquipment, net	Answer	Answer

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