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Question is: P Co. Owns 60% of S Co. and on 1 January 2001 S Co Sells plant costing $10,000 to P Co. for $12500.
They make account to 31 Dec 2001. and the Balance of their R/E :
P: after charging depreciation of 10% on plant —————— $27,000
S: including profit on sale of plant —————————— $ 18,000what is Consolidated R/E?
the answer is:
P: 27,0000
+
60% of S: (18,000 – 2500 + 250) 60% = 9,450= 36,450
I didn’t understand why depreciation adjustment amount (250) is added back to the subsidiary not Parent ?
Good question!
The answer is that, of that $2,500 pup, 1/10th is now recognised and, as each year goes by, 1/10th is recognised for each of those successive years
So the pup of $2,500 in the subsidiary is, over the life of the asset, being realised
The course notes do explain this – have you read them?
Is that ok as an explanation?
Ok, the pup on the transfer of the plant from subsidiary to parent is recognised in the subsidiary
Over the next ten years, that plant will be depreciated down to zero
Surely that means that, by the parent’s usage of that asset, the pup recognised by the subsidiary on the transfer is being realised over those ten years
The depreciation on that profit element therefore represents the extent to which that pup is realised each year so a pup for the full amount in the subsidiary should be annually adjusted – it’s no longer a provision for UNrealised profit because 1/10 is effectively realised each year
Is that better?
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