June 2011 Q1 (ii)

"Why are we reducing the retained earning of the seller by 800 000?" post from 12.59 "We also need to reduce the seller’s retained earnings as the seller has already increased retained earning by 800." post from 1.03 Is this the same Dreamer SK? Because Prodigal has incorrectly dealt with the $1,000 gain on the transfer as a credit to the depreciation, we need reverse that bad entry by a debit to cost of sales and a credit to TNCA Then we need to deal with the depreciation adjustment related to that $1,000. the adjustment is for $200 and the correct treatment will be to debit cost of sales and credit TNCA by that $200 Those adjustments to the cost of sales HAVE been corrected - at least they have in the copy of the answer that I have in front of me Is that OK now?

What was I thinking? The $1,000 that has been deducted from the depreciation expense needs to be added back into cost of sales and the $200 that has been added into depreciation in cost of sales needs to come out So the net effect is an $800 increase to cost of sales ($1,000 increase and $200 decrease) This $800 should now be credited into comprehensive income Is that better?

"Where does it say that 200 has been added to depreciation?" - Sentinel has recorded the acquisition of the plant and Sentinel will therefore have depreciated that plant based on a $5,000 purchase cost to Sentinel We can calculate that the depreciation on the profit element of the $5,000 is $200 for the half year since acquisition and that $200 has been charged to cost of sales OK with that bit? I'm not sure what you're asking here "What would the treatment be if Prodigal didn’t account for the item of plant. Would it still be a net effect of 800?" I'm going to look at this problem from the perspective of a statement of financial position exercise and reconcile the figures to working W3 consolidated retained earnings (H's own + H's share of S post acq retained - goodwill impaired since acquisition (just our share)) H's own brought forward 90,000 H's own this year 89,900 Less net pup on asset transfer (800) H's own at year end 179,100 S post acq 6/12 x 66,000 33,000 Less pup on cl inventory ( 3,000) H's share of S post acq 75% x 30,000 22,500 Cons Ret Ears 201,600 That $1,000 wrongly credited in cost of sales requires a cosmetic adjustment to get it back out of cost of sales and credit it elsewhere in prodigal's statement of profit or loss (profit on intra-group asset sale) which then needs to be eliminated in working W3 Consolidated Retained Earnings Prodigal will be showing (after taking it out of cost of sales) a credit in sundry gain on asset transfer and Sentinel has depreciated the $200 in cost of sales On consolidation, that $200 will be deducted from Cost of Sales, the $1,000 will be added back and the net figure $800 adjusted against Prodigal's retained earnings Is that better?

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