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Company A selling of one of its component X. Valuation report at March 2014 shows that it has an asset worth of 5 million. However, actual transferred only took place in July 2014 from which it has a value of 10 million now. It was due to additions of asset during the period.
So, buyer will be paying 5 million based on the agreement in March 2014. Buyer will:
DR: Asset 10 million
CR: Bank 5 million
CR: Suspense account 5 millionI would like to ask what would be the treatment for the suspense account in buyer perspective.
HHow much is the buyer paying? $5m? So the double entry is Dr PPE $5, Cr Bank $5m
Now, if the buyer is using the cost model – that’s the end of the matter. If the buyer is using revaluation model, then Dr PPE an additional $5m, Cr Revaluation Reserve $5m
Where does the suspense account come in?
Incidentally, it was a bit stupid of the seller to spend an additional $5m on a $5m asset that it has agreed to sell for $5!
Let me draft it in a more clear situation.
Company A have two operations namely food and beverage (Segment X) and clothing division (Segment Y).
Then, Company A decided to dispose of Segment X and form a Company B to take care of Segment X. So, Company A will have Segment Y and Company B will have Segment X.
In March 2014, valuation was carried out to determine the value of Segment X and it was determined to be 5 million. Although actual transferred date is July 2014, Company A decided to have March 2014 value to be the consideration received from Company B.
However, during the period (from March14 to July14), there are additions of asset for Segment X. Therefore, the transferred to Company B would be 5 million (Mar14) and 5 million (July14).
The sales consideration remained at 5 million.
So, Company B will
DR Asset 10 million
CR Bank 5 millionQuestion is how should we accounted for the difference of 5 million. Should we credited to revaluation reserve account because the difference was due to additions of asset, not revaluation.
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