Intra-Entity Equipment Sales — Depreciation Cascade and Long-Term Effects

When equipment is sold within a group, the gain must be eliminated in consolidation, and the buyer’s future depreciation must be adjusted to reflect the group’s original carrying amount.

These adjustments affect consolidated net income over the asset’s remaining life and must be tracked consistently until the asset is sold externally or fully depreciated.

1. Overview of intra-entity equipment transfers

Intra-entity equipment transfers typically arise when:

• A parent sells machinery or equipment to a subsidiary.

• A subsidiary transfers equipment to another subsidiary under common control.

Although recorded as a sale in the individual books, the group as a whole retains control, so:

• The gain is not realized.

• Depreciation must be corrected to reflect the original cost basis.

2. Example — Intra-group equipment transfer

Scenario:

Subsidiary A sells equipment to Parent Co. for $120,000Original book value = $80,000Remaining useful life = 4 yearsTransfer gain = $40,000

Subsidiary A entry (seller):

• debit Cash .............................................................................. $120,000

• credit Equipment .................................................................... $80,000

• credit Gain on Sale of Equipment ........................................ $40,000

Parent Co. records:

• debit Equipment ................................................................... $120,000

• credit Cash .............................................................................. $120,000

3. Consolidation entries — Initial year (T 0)

Step 1: Eliminate gain

• debit Gain on Sale of Equipment ........................................ $40,000

• credit Equipment .................................................................... $40,000

Step 2: Adjust equipment depreciation

New depreciation (based on $120,000) = $30,000/yearCorrect depreciation (based on $80,000) = $20,000/year

Overstated depreciation = $10,000/year

• debit Equipment .................................................................... $10,000

• credit Depreciation Expense ................................................ $10,000

These entries align the consolidated income statement and asset balance with historical group values.

4. Tracking the depreciation cascade over time

Each year, the depreciation must be corrected.

Year	Depreciation per Buyer	Adjustment Required	Consolidated Depreciation	Deferred Gain Remaining
T 1	$30,000	–$10,000	$20,000	$30,000
T 2	$30,000	–$10,000	$20,000	$20,000
T 3	$30,000	–$10,000	$20,000	$10,000
T 4	$30,000	–$10,000	$20,000	$0 (fully reversed)

The deferred gain is reversed systematically through lower depreciation expense over the asset’s life.

5. Alternative ownership directions — downstream vs. upstream

Direction	Who sold the asset?	Effect on Income Attribution
Downstream	Parent to subsidiary	Full elimination affects parent’s income
Upstream	Subsidiary to parent	Elimination affects investor’s income pro rata; NCI keeps its share

For upstream transactions, the NCI share of income must be preserved, and only the parent’s share of gain and depreciation are eliminated.

6. When equipment is retired or sold externally

If the equipment is retired early or sold to a third party:

• Any unreversed deferred gain is recognized in full

• If sold externally, a new realized gain or loss is computed based on the consolidated carrying amount

Example:

Unreversed deferred gain = $10,000Sale to third party = $15,000Consolidated carrying amount = $0Recognize full gain = $15,000 (external sale)

Also reverse remaining deferral:

• debit Equipment .................................................................. $10,000

• credit Gain on Sale (reversal) ............................................. $10,000

7. Tax and deferred tax considerations

If the internal sale created a taxable gain, but no book gain was recognized in consolidation:

• A deferred tax liability (DTL) arises for the temporary difference.

• The DTL reverses as depreciation expense is recognized over time.

Initial DTL entry:

• debit Deferred Tax Expense

• credit Deferred Tax Liability

Annual reversal:

• debit Deferred Tax Liability

• credit Deferred Tax Benefit (P&L)

8. Disclosure and audit focus

Auditors examine:

• Consistency in tracking intra-entity gains and depreciation adjustments

• Proper classification of equipment values in consolidation

• Recognition of any deferred tax impacts and related reversals

• Schedules of unreversed deferred gains

Disclosure example:

“During 2024, the Group eliminated $40,000 in unrealized gain related to intra-group equipment transfers. Depreciation was adjusted by $10,000 per year over the asset’s remaining four-year life. As of December 31, $20,000 in deferred gain remains unrecognized.”

Key take-aways

• Gains on intra-entity equipment transfers must be deferred in full at the group level.

• Depreciation expense must be adjusted annually to reflect the original cost basis.

• The gain is gradually reversed through reduced depreciation until the asset is sold externally or retired.

• Taxable internal gains trigger deferred tax liabilities, which must be tracked and reversed over the asset’s useful life.

• Complete reconciliation schedules ensure accuracy and support audit and disclosure requirements.