How are intercompany depreciable assets treated in elimination entries?

Intercompany depreciable assets are included in consolidation adjustments to eliminate any gains that have been recognized within the consolidated financial statements. When one company sells depreciable assets to another company within the same group, any gain on that sale must be eliminated upon consolidation to avoid inflating income within the consolidated financial statements.

The correct treatment involves adjusting the carrying value of the asset and the associated accumulated depreciation to reflect the original cost of the asset to the selling entity before the intercompany transaction took place. This means that any intercompany profit from the sale is removed from the asset value, thereby restoring the original basis of the asset. This allows for proper depreciation expense recognition in future periods.

It's essential to recognize that although the asset and its related depreciation must be adjusted, they are not completely written off nor is it the case that only accumulated depreciation is adjusted without considering the asset itself. The goal is to have a correct representation of the asset on a consolidated basis, which includes both the adjustment to the asset value and the related accumulated depreciation to reflect the reality of the group as if the transaction had not occurred.