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Example prodigal in lesson 9 ( revision kit)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Example prodigal in lesson 9 ( revision kit)

  • This topic has 1 reply, 2 voices, and was last updated 1 month ago by P2-D2.
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  • Author
    Posts
  • December 19, 2022 at 1:41 pm #674906
    minhnguyen@abc
    Member
    • Topics: 12
    • Replies: 16
    • ☆

    This is other question which asked before but my problem is similar to her so I hope tutor can help us
    Hi everyone, I’m confused about this question.

    (Prodigal) (Sentinel)
    Revenue 450,000 240,000
    Cost of sales (260,000) (110,000)
    On 1 October 20X0 Prodigal purchased 75% of the equity shares in Sentinel. The acquisition was through a share exchange of two shares in Prodigal for every three shares in Sentinel. The stock market price of Prodigal’s shares at 1 October 20X0 was $4 per share

    The following information is relevant:
    Immediately after the acquisition of Sentinel on 1 October 20X0, Prodigal transferred an item of plant with a carrying amount of $4 million to Sentinel at an agreed value of $5 million. At this date the plant had a remaining life of two and half years. Prodigal had included the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales.

    Answer:
    1.10.20X0 Profit on transfer (5,000 – 4,000) 1,000
    Proportion depreciated (½ / 2½) = (200)
    Adjustment to plant 800
    Required adjustment:
    Dr Cost of sales (and retained earnings) 850
    Cr Plant 800
    Cr NCI (200 × 25%) 50
    Note that the excess depreciation is credited to the subsidiary. This is netted
    off against the unrealised profit in group cost of sales, but 25% must be
    credited to the NCI

    ===> Cost of sales in CONSOLIDATED STATEMENT OF PROFIT OR LOSS : (260,000 + (110,000 × 6/12) + (W3) 800
    NCI: Non-current asset PURP (W3) excess depreciation 200

    My problem is why they adjust to plant 800 for cost of sales and 200 for NCI.
    Thank you verymuch

    December 30, 2022 at 8:44 am #675198
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6473
    • ☆☆☆☆☆

    Hi,

    The 800 comes from the profit on disposal of the asset at 1,000 and the removal of the additional depreciation being charged at 200. This is taken to CoS.

    The adjustment to NCI is tricky but essentially they are then saying that the additional depreciation charged would have been in the books of the subsidiary as they hold the transferred asset and therefore we need to adjust for the NCI share of this additional depreciation. I’d not worry too much about this aspect in the exam as there are far easier parts to deal with first.

    Thanks.

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