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Hi all,
F7, Mini exercise question 5
During the year S sold some PPE for H for 65,000. The original cost was 100,000 when new, 4years ago and its useful life was 9 years has not changed. Estimated scrap proceeds of $10,000 was revised or transfer to H to 20,000. Depreciation is charged on a straight line basis with fulll depreciation in the year of purchase and none in the year of sale.I understand cost – scrap / useful life = yearly dep’n
100,000-10000=90000/9=10000×4=400000NBV =100,000-40,000=60,000
The asset was sold for 65,000 giving a profit of 5,000
the exercise then goes on further to subtract 8,000 from the 60,000 and 9000 from the 65000 giving a pup of 4000 ( This is the part of do not undertand.
can someone please explain. Thanks
please correct me if I’m wrong I think that your confusion is in assuming that the $5k profit was ever real.
These are two related companies with a transfer between them so that profit is not real.
Company S has applied $40k depreciation leaving a carrying value of $60k
The residual value is no longer $10k but $20k therefore if the transfer had not taken place $40k ($60k – $20k) would have been depreciated over the remaining 5 years at $8k p.a. ($40k/5)Company H purchased the PPE for $65k with an estimated residual of $20k therefore $45k ($65k – $20k) is depreciated over the remaining 5 years at $9k p.a. ($45k/5)
Therefore the PUP can be calculated as what is less what should have been or (($65k-£9k)-($60k-$8k)) = ($56k – $52k) = $4k
Hope that the above makes sense,
kind regards,
Shaun.p.s. sure that there’s an easier way than the above but thats how my dyslexic grey matter works. Anyone else feel free to improve the above with alternate approaches.
Thanks Shaun,
The explanation is quite reasoable and correct thank you very much for your speedy response
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