How do you eliminate an upstream intercompany fixed asset sale in consolidation?
Fairgrove Corp owns 75% of Ashland Manufacturing. In 2025, Ashland (subsidiary) sold equipment with a book value of $120,000 to Fairgrove (parent) for $200,000. The equipment has a remaining life of 8 years after the transfer. I understand we need to eliminate the $80,000 gain, but what about the depreciation adjustment in subsequent years? And since it's upstream, does the NCI share in the elimination?
Upstream intercompany transactions are trickier than downstream because the NCI shares in the subsidiary's gain elimination. Let me walk through the full mechanics.
Year of Sale (2025)
Ashland (sub) recorded:
- Sale proceeds: $200K
- Book value removed: $120K
- Gain on sale: $80K (in Ashland's standalone income)
Consolidation elimination entry:
- DR: Gain on sale of equipment — $80K
- CR: Equipment — $80K (to reset asset to original cost basis)
Why? From the consolidated entity's perspective, no sale occurred. The asset simply moved within the group.
NCI Impact (Upstream = NCI Shares)
Since Ashland is the seller, the $80K unrealized gain is on Ashland's books. Fairgrove owns 75%, NCI owns 25%. The gain elimination is shared:
- Attributable to parent: 75% x $80K = $60K
- Attributable to NCI: 25% x $80K = $20K
Both parent's and NCI's consolidated income are reduced.
Subsequent Year Depreciation Adjustment
Fairgrove is now depreciating the equipment based on the $200K transfer price over 8 years:
Fairgrove's depreciation = $200K / 8 = $25K/year
But the correct consolidated depreciation should be based on the original $120K:
Correct depreciation = $120K / 8 = $15K/year
Excess depreciation = $25K - $15K = $10K/year
This $10K represents realized profit each year. Consolidation adjustment:
- DR: Accumulated depreciation — $10K
- CR: Depreciation expense — $10K
Year 2 Example
Remaining unrealized gain = $80K - $10K = $70K. NCI's share of remaining unrealized gain = 25% x $70K = $17.5K.
Downstream vs. Upstream Summary
| Feature | Downstream (Parent sells) | Upstream (Sub sells) |
|---|---|---|
| Who records the gain? | Parent | Subsidiary |
| NCI shares elimination? | No | Yes |
| Full gain eliminated? | Yes | Yes |
Exam tip: Always check the direction. If the question says the subsidiary sold to the parent, it's upstream and NCI is affected.
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