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hi mike,
P co owns 60% of S co and on 1 January 2001, S co sells the plant costing $10,000 to P co for $12500. The companies makes there accounts to 31 December and the balances on their retained earnings are as follows,
P co after charging dep 0f 10% on plant – $27000
S co including profit on sale – $ 18000
What they have done is as followsS Co,
Per question – 18000
Profit – (2500)
Dep 250
= 15,750I understand that they have removed the unrealised profit from S retained earnings, however the plant is now P co and they have charged the excess dep so should the adjustment not be made for P cos retained earnings rather than S cos.
That unrealised profit is gradually realised as the years go by so the pup (net) is adjusted through the records of the selling entity
For many years I agreed with your thinking but relatively recently I’ve been converted to this revised thinking
Remember, make the NET adjustment in the records of the selling entity
OK?
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