When consolidating a subsidiary, how do you account for an intercompany sale of a non-current asset (e.g., equipment) that is still held by the buyer at year-end? Walk through the elimination entries and the impact on the group's depreciation.
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
We eliminate the unrealized gain on the sale from group retained earnings and the asset's carrying amount. The entry is: Dr Gain on Sale (in seller's P&L), Cr Equipment (in buyer's books). For depreciation, if the buyer has depreciated the asset based on the inflated cost, we reverse the excess depreciation by Dr Accumulated Depreciation, Cr Depreciation Expense. The net effect is that the asset is carried at original cost and depreciation reflects that cost. This adjustment also affects deferred tax if tax bases differ.
WHAT INTERVIEWERS LISTEN FOR
- ✓Eliminate unrealized gain against asset carrying value
- ✓Reverse excess depreciation on inflated cost
- ✓Consider deferred tax implications
COMMON MISTAKES
- ✗Only eliminating the gain without adjusting depreciation
- ✗Ignoring deferred tax on the elimination
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