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P Co owns 60% of S Co and on 1 January 2016 S Co sells plant costing $10,000 to P Co $12,500. The company make up accounts to 31 December 2016 and the balance on their retained earning at that date are :
P Co ( after charging depreciation of 10% on plant ) $27,000
S Co ( including profit on sales on plant ) $18,000Required : Show the working for consolidated retained earning
Dr Group Retained Earning $1,350
Non-Controlling Interest $900
Cr Non-Current Assets $2,250 ( profit less additional depreciation )I understand the value of non-current assets have been overstate by $2,500 because of the transaction , also there will be excess depreciation $250.However , i wonder why the 40% of excess depreciation will become the profit belong to the Non-Controlling Interest?
Dr Group Retained Earning $1.500
Non – Controlling Interest $1,000
Cr Non-Current Assets $2,500Dr Acc . Depreciation $250
Cr Group Retained Earning $150
Non-Controlling Interest $100This is another way to do the adjustment, this adjustment is likely to tell us the 40% of the excess depreciation is become profit to the non-controlling interest .
the reason for the split 60% / 40% parent entity / nci is because the parent is entitled only to 60% of the subsidiary’s post-acquisition results
Those results have been improved by the intra-group transfer at a profit of $2,500 ( now less $250 depreciation on that unrealised profit giving a net figure of $2,250)
That net unrealised profit should be deducted from the subsidiary’s results by debiting $2,250 against the subsidiary’s post-acquisition retained earnings
In so doing, the parent’s share of those subsidiary post-acquisition retained earnings falls by 60% of $2,250 = $1,350 and the nci’s share of those subsidiary post-acquisition retained earnings falls by 40% of $2,250 = $900
Does that explain it for you?
I can’t understand why the 40% of excess depreciation will become profit to the non-controlling interest .
I can understand the P Co only will get cover 60% of the excess depreciation , since it only hold 60% of S Co . However , i really struggle why the balance of the excess depreciation will become profit to the non-controlling interest .
Because the subsidiary’s profits have been artificially understated to the extent of the excess depreciation charged on the unrealised gain
When the subsidiary sold, they recognised a profit of $2,500
Over the next 10 years that profit will become progressively realised at the rate of $250 each year
So, here we are, at the end of the first year and $250 of that $2,500 is treated as realised but leaves $2,250 still unrealised
If you look on it as an overcharge of depreciation so that, when the adjustment is made, the subsidiary’s profits are ‘corrected’ to reflect the position that would have obtained if the sale had not been made, maybe that will help
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