(EQUITY METHOD)

Eliminating entries

(E1) Common stock – Subsidiary xx

Retained earnings – Subsidiary xx

Investment in subsidiary (CI%) xx

Non-controlling interest (NCI%) xx

To eliminate investment account and recognize NCI

(E2) Inventory xx

Accumulated depreciation - equipment xx

Accumulated depreciation - buildings xx

Land xx

Discount on bonds payable xx

Goodwill xx

Buildings (if overvalued- FV<BV) xx

Investment in subsidiary (CI%) xx

Non-controlling interest (NCI%) xx

To eliminate investment on January 1, 20x4 and allocate the excess of cost over book
value of identifiable assets acquired, with remainder to goodwill and to establish non-
controlling interest (in net assets of subsidiary) on date of acquisition
(E3) Cost of goods sold xx

Depreciation expense (equipment and building) xx

Accumulated depreciation - buildings xx

Interest expense xx

Goodwill impairment loss xx

Inventory xx

Accumulated depreciation - equipment xx

Discount on bonds payable xx

Goodwill (same amount with impairment loss) xx

To provide for current year impairment loss and depreciation and amortization on
differences of BV and FV of S identifiable assets and liabilities.

(E4) Investment income (computed) xx

Investment in subsidiary (credit balance computed) xx

Non-controlling interest (Div paid x NCI%) xx

Dividend paid – Subsidiary xx

To eliminate intercompany dividends and investment income under equity method and
establish share of dividends

*Investment in subsidiary (debit balance)

Net income of Sub x CI%

Less Amortization and impairment loss

Less Dividend from sub

Add Realized gain on inventory 100% (downstream) (if meron beginning)

Add Realized gain on inventory CI% (upstream)

Add Realized gain on equipment 100% (downstream) (current year depreciation)

Add Realized gain on equipment CI% (upstream)

Less Unrealized gain on inventory 100% (downstream)

Less Unrealized gain on inventory CI% (upstream)

Less Unrealized gain on equipment 100% (downstream) (for current year only, subsequent year
do not deduct anymore)

Less Unrealized gain on equipment CI% (upstream) (for current year only, subsequent year do
not deduct anymore)

Less Unrealized gain on land (for current year only, subsequent year do not deduct anymore)

*Investment income (credit balance)

Net income of Sub x CI%

Less Amortization and impairment loss

Add Realized gain on inventory 100% (downstream) (if meron beginning)

Add Realized gain on inventory CI% (upstream)

Add Realized gain on equipment 100% (downstream) (current year depreciation)

Add Realized gain on equipment CI% (upstream)

Less Unrealized gain on inventory 100% (downstream)

Less Unrealized gain on inventory CI% (upstream)

Less Unrealized gain on equipment 100% (downstream) (for current year only, subsequent year
do not deduct anymore)

Less Unrealized gain on equipment CI% (upstream) (for current year only, subsequent year do
not deduct anymore)

Less Unrealized gain on land (for current year only, subsequent year do not deduct anymore)
(E5) Sales xx

Cost of goods sold xx

To eliminate intercompany downstream sales

(E6) Sales xx

Cost of goods sold xx

To eliminate intercompany upstream sales

(E7) Cost of goods sold (Ending inventory – Income statement xx

Inventory – Balance Sheet xx

To defer the downstream sales – unrealized profit in ending inventory until it is sold to
outsiders

*Intercompany sale x Ending inventory % x Profit%

 If profit is based on selling price just multiply to Profit %

If profit is based on cost, multiply to Profit% / 100+% (e.g. 25/125)

(E8) Cost of goods sold (Ending inventory – Income statement xx

Inventory – Balance Sheet xx

To defer the upstream sales – unrealized profit in ending inventory until it is sold to
outsiders

*Intercompany sale x Ending inventory % x Profit%

 If profit is based on selling price just multiply to Profit %

If profit is based on cost, multiply to Profit% / 100+% (e.g. 25/125)

(E5) Gain on sale of equipment (SP-BV) xx

Equipment (Orig cost- Selling Price) xx

Accumulated depreciation xx

To eliminate the downstream unrealized gain on sale and restore

equipment to its original cost and accumulated depreciation to its balance
(E6) Gain on sale of equipment(SP-BV) xx

Equipment (Orig cost- Selling Price) xx

Accumulated depreciation xx

To eliminate the upstream unrealized gain on sale and restore equipment

to its original cost and accumulated depreciation to its balance

(E7) Accumulated depreciation xx

Depreciation expense xx

To adjust depreciation on equipment & realize a portion of the gain

thru usage (downstream)

(E8) Accumulated depreciation xx

Depreciation expense xx

To adjust depreciation on equipment & realize a portion of the

gain thru usage (upstream)

(E5) Gain on sale of land xx

Land xx

To eliminate unrealized intercompany gain on sale of land

(E9) Non-controlling interest in Net Income of Subsidiary xx

Non-controlling interest xx

To establish NCI in subsdiary's adjusted NI

*Sub net income

Less Amortization
Less impairment loss NCI share
Less Unrealized gain in ending inventory (upstream)
Add Realized gain in ending in beginning inventory (upstream)
Less Unrealized gain on Equipment (for first year only; upstream)
Add Realized Gain on Equipment (current year only)
Less unrealized gain on land (upstream)
Subsequent years (Equity Method)

Eliminating entries

(E1) Common stock – Subsidiary xx

Retained earnings – Subsidiary (current year adjusted)xx

Investment in subsidiary (CI%) xx

Non-controlling interest (NCI%) xx

To eliminate investment account and recognize NCI

(E2) Accumulated depreciation – equipment (total – prior year) xx

Accumulated depreciation – building (total + prior year) xx

Land xx

Discount on bonds payable (total – prior year) xx

Goodwill (Total – impairment loss) xx

Buildings (if overvalued- FV<BV) xx

Investment in subsidiary (CI%) xx

Non-controlling interest (NCI%) xx

To eliminate investment on January 1, 20x5 and allocate the excess of cost over book
value of identifiable assets acquired, with remainder to goodwill and to establish non-
controlling interest (in net assets of subsidiary) on date of acquisition ADJUSTED AMOUNTS
(E3) Depreciation expense (equipment and building) xx

Accumulated depreciation – buildings (Current year ) xx

Interest expense xx

Accumulated depreciation – equipment (Current year ) xx

Discount on bonds payable (Current year and prior years) xx

To provide for current year impairment loss and depreciation and amortization on
differences of BV and FV of S identifiable assets and liabilities.

(E4) Investment income (computed) xx

Non-controlling interest (Div paid x NCI%) xx

Dividend paid – Subsidiary xx

Investment in subsidiary (debit balance computed) xx

To eliminate intercompany dividends and investment income under equity method and
establish share of dividends

*Investment in subsidiary (debit balance)

Net income of Sub x CI%

Less Amortization and impairment loss

Less Dividend from sub

Add Realized gain on inventory 100% (downstream) (if meron beginning)

Add Realized gain on inventory CI% (upstream)

Add Realized gain on equipment 100% (downstream) (current year depreciation)

Add Realized gain on equipment CI% (upstream)

Less Unrealized gain on inventory 100% (downstream)

Less Unrealized gain on inventory CI% (upstream)

Less Unrealized gain on equipment 100% (downstream) (for current year only, subsequent year
do not deduct anymore)
Less Unrealized gain on equipment CI% (upstream) (for current year only, subsequent year do
not deduct anymore)

Less Unrealized gain on land (for current year only, subsequent year do not deduct anymore)

*Investment income (credit balance)

Net income of Sub x CI%

Less Amortization and impairment loss

Add Realized gain on inventory 100% (downstream) (if meron beginning)

Add Realized gain on inventory CI% (upstream)

Add Realized gain on equipment 100% (downstream) (current year depreciation)

Add Realized gain on equipment CI% (upstream)

Less Unrealized gain on inventory 100% (downstream)

Less Unrealized gain on inventory CI% (upstream)

Less Unrealized gain on equipment 100% (downstream) (for current year only, subsequent year
do not deduct anymore)

Less Unrealized gain on equipment CI% (upstream) (for current year only, subsequent year do
not deduct anymore)

Less Unrealized gain on land (for current year only, subsequent year do not deduct anymore)

(E5) Sales xx

Cost of goods sold xx

To eliminate intercompany downstream sales (current year

(E6) Sales xx

Cost of goods sold xx

To eliminate intercompany upstream sales (current year)

(E7) Investment in subsidiary xx

Cost of goods sold (Beginning Inventory- I/S) xx

To realized profit in downstream beginning inventory deferred in prior period

*Last year ending inventory

(E8) Investment in subsidiary xx

Non-controlling interest xx

Cost of goods sold (Beginning Inventory- I/S) xx

To realized profit in upstream beginning inventory deferred in prior

period

*Last year ending inventory

(E9) Cost of goods sold (Ending inventory – Income statement xx

Inventory – Balance Sheet xx

To defer the downstream sales – unrealized profit n ending inventory until it is sold to
outsiders (current year)

(E10) Cost of goods sold (Ending inventory – Income statement xx

Inventory – Balance Sheet xx

To defer the upstream sales – unrealized profit n ending inventory until it is sold to
outsiders (current year)
(E5) Investment in subsidiary xx

Equipment (Orig cost- Selling Price) xx

Accumulated depreciation xx

To eliminate the downstream unrealized gain on sale and restore

equipment to its original cost and accumulated depreciation to its balance

(E6) Investment in subsidiary xx

Non-controlling interest xx

Equipment (Orig cost- Selling Price) xx

Accumulated depreciation xx

To eliminate the upstream unrealized gain on sale and restore equipment

to its original cost and accumulated depreciation to its balance

(E7) Accumulated depreciation (Current and prior year) xx

Depreciation expense xx

Investment in subsidiary (prior year dep exp) xx

To adjust depreciation on equipment & realize a portion of the gain

thru usage

(E8) Accumulated depreciation (Current and prior year) xx

Depreciation expense xx

Investment in subsidiary (prior year dep exp) (CI%) xx

Non-controlling interest (prior year dep exp) (NCI%) xx

To adjust depreciation on equipment & realize a portion of the gain

thru usage
(E5) Investment in subsidiary (100%) xx

Land xx

To eliminate downstream unrealized intercompany gain on sale of land

*this is the intercompany gain on sale of land

(E6) Investment in subsidiary (CI%) xx

Non-controlling interest, beg. (NC%) xx

Land xx

To eliminate upstream unrealized intercompany gain on sale of land

*this is the intercompany gain on sale of land

(E9) Non-controlling interest in Net Income of Subsidiary xx

Non-controlling interest xx

To establish NCI in subsdiary's adjusted NI

*Sub net income

Less Amortization
Less impairment loss NCI share
Less Unrealized gain in ending inventory (upstream)
Add Realized gain in ending in beginning inventory (upstream)
Less Unrealized gain on Equipment (for first year only; upstream)
Add Realized Gain on Equipment (current year only)
Less unrealized gain on land (upstream)
Year of Sale

(E1) Investment in subsidiary xx

Non-controlling Interest beginning xx

Gain on sale of equipment xx

To adjust reported gain on the sale of equipment by P company to

third party (upstream sale)

*Unrealized gain less realized gain since the date of intercompany sale

(E1) Investment in subsidiary xx

Gain on sale of equipment xx

To adjust reported gain on the sale of equipment by P company to

third party (downstream)

*Unrealized gain less realized gain since the date of intercompany sale

(E1) Investment in subsidiary xx

Non-controlling interest- beginning xx

Gain on sale of land xx

To adjust reported gain on the sale of land by P company to third

party (upstream)

*Recognize the whole gain as if there is no intercompany sale transaction

(E1) Investment in subsidiary xx

Gain on sale of land xx

To adjust reported gain on the sale of land by P company to third

party (downstream)

*Recognize the whole gain as if there is no intercompany sale transaction