mini excercises 5 question 1

A “down” arrow is a shorthand version of “reduce” so when there is a down arrow against an expense heading, that means that we need to reduce that expense ie we need to credit that account

The crucial element in the question is that the land was sold within the group AT A PROFIT and, so far as the group is concerned, that profit is unrealised

So, for the purposes of the consolidation, we need to remove that profit from the retained earnings of the entity that has recognised the profit (in this case, that’s the parent entity … but it won’t always be the parent, so beware)

In addition to reducing the retained earnings of the parent (a debit to the retained earnings) we need to bring the land value back to the amount that the group paid for the land.

Therefore we need to reduce the figure for land by that 40,000 ie we need to credit the TNCA

“I don’t understand this, has the TCNA should have already been reduced by the sale of the asset”

No! Imagine the group as a pair of trousers and all we have done here is taken the land out of one pocket and put it into the other pocket. But we took it out from one pocket at $X and we put it back into the other pocket at $X + $40,000

“Also why have we reduced our retained earnings as we have received an additional 40,000”

We haven’t! All we have done is move that additional $40,000 (part of the $X + $40,000) from one pocket to the other. If you start the evening with $20 in your possession in your right hand pocket and you finish the evening with $20 in your left hand pocket, how much have you received during your (very boring, couch potato) evening?

Better?