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Hi all, was wondering if I could get a hand with / or someone can walk me through how to tackle this question:
Company Corp. (CC) owns 40% of Tata Inc. (TT). On October 1, 20X5, TT sold CC equipment with a book value of $400,000 for $500,000 cash. The remaining useful life of the equipment is estimated to be four years; the estimated residual value is $0. Both
companies depreciate equipment on a straight-line basis and have a December 31 year
end. They both pay income tax at a rate of 20%. Which of the following statements accurately describes the total effect of the journal entry or entries CC will record in 20X5, as a result of the transaction described above?a) CC will credit its Depreciation expense account $2,500.
b) CC will credit its Investment in associate account $10,000.
c) CC will debit its Investment income account $30,000.
d) CC will credit its Investment in associate account $37,500Hi
Please do me a favour and check that you have typed your question accurately!
I ask because none of the options that you have given makes any sense
And what does the printed solution give as the appropriate option?
Hi Mike, the question is typed correctly, this one got me stumped.. I do not have a solution to this one yet but I have one similar with solution, but it is a down-stream example where as the question above is a up-steam example. see below for my other example:
Big Corp. sold equipment to Carin Inc. for $300,000 on January 1, 20X6. At the
time of sale, the net book value of the equipment on Big’s books was $250,000.
The remaining useful life of the equipment is five years; the estimated residual value is
$0. Big Corp owns 40% of Carin Inc. Both companies depreciate equipment on a straightline basis and pay income tax at a rate of 30%.Required:
Prepare the required adjusting entries for Big Corp for its year ended December 31, 20X6.Solution:
Preliminary calculations
Transaction price $300,000
Net book value 250,000
Unrealized gain 50,000
Investor’s share 40%
Initial adjustment required 20,000
Remaining useful life 5 years
Amount realized annually through excess depreciation $4,00020X6 (unrealized profit on sale)
DR Investment income 20,000
CR Investment in associate 20,000DR Investment in associate ($20,000 × 30%) 6,000
CR Investment income – income tax expense 6,00020X6 (realized profit through excess depreciation)
DR Investment in associate 4,000
CR Investment income 4,000DR Investment income – income tax expense ($4,000 × 30%) 1,200
CR Investment in associate 1,200My question is, would the journal entries change if it downstream vs upstream, or can i follow the same logic?
I wouldn’t use the account Investment Income to record a profit on the disposal of an asset
You will never be asked to take the workings through to beyond the tax implications in an F7 exam
Given that Investment in Associate is calculated as:
Cost +
Share of post acquisition retained –
Any impairment
I suggest that the adjustments that you have recorded go beyond the necessary
When an entity disposes of an asset the profit on that disposal is not subject to ‘ordinary’ tax rules
Rather a balancing allowance or balancing charge is calculated. This allowance or charge is not available to be calculated in your examples because it’s the difference between sale proceeds of the asset compared with the tax written down value of that asset and that is information that we don’t have
Adjustments for unrealised profits arising from trading transactions with associate entities are achieved in either of two ways
1) make the adjustment in the records of the entity that has recognised the profit and that adjustment is the result of applying the parent’s percentage holding to the total unrealised profit. That figure is then debited to consolidated retained earnings and credited in arriving at the figure ‘Investment in Associate
2) make the adjustment in the records of the associate (no matter whether it’s an upstream or a downstream transaction) and that adjustment is for the total unrealised profit. That figure reduces the amount of post-acquisition retained earnings in the associate and the parent’s percentage is applied to that reduced retained earnings figure
The effect is to debit consolidated retained earnings and credit the figure ‘Investment in Associate’
hi mike i had the same question.
i wrote D as the answer because:
Unrealized profit of Associate= 100000*40%=(40000)
depreciation for 3months = 25000*3/12=6250Net effect= (33750) (investment in associate)
and ahead, i assumed that associate has recorded profit of 100000-25000=75000 out of which he paid a tax of 20%=15000
we will also have to reverse the effect of this tax payment 15000*3/12= (3750)
effect being 37500 credit. to investment in associate.
please help
I stand by my original post:
“When an entity disposes of an asset the profit on that disposal is not subject to ‘ordinary’ tax rules
Rather a balancing allowance or balancing charge is calculated. This allowance or charge is not available to be calculated in your examples because it’s the difference between sale proceeds of the asset compared with the tax written down value of that asset and that is information that we don’t have”
Where’s the question from?
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