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On 1 October 2014, Heidi transferred an item of machinery to Keisha. The machine had originally cost $1.2 million on 1 October 2009, and it was transferred to Keisha for $1 million. Machines have a useful life of ten years. The useful economic life has not changed as a result of the transfer.
Heidi is the parent.
So sir while calculating pre-acquisition retained earnings of Keisha we should exclude the depreciation of the asset transferred which is $50000, right?I calculate the accumulated depreciation as at transfer date to be 5 years’ worth and that equated to $600,000, not $500,000!
At transfer date the carrying value was $600,000 and the asset was transferred at $1,000,000 giving an unrealised profit of $400,000
That pup will affect 5 years so the extent that depreciation is affected will be $400,000 / 5 = $80,000 each year
Does that answer you?
Oh yeah right.
And the depreciation for the acquired plant must have been calculated by the subsidiary and deducted from its profits but as the depreciation only relates to the post acquisition period should’nt we adjust the pre acq. retained earnings. Like here this year profits are $5200k for the the subsidiary and acquisition is half way through the year. So should we add back depreciation of $100k to profits and then divide post and pre acquisition ?Apart from the adjustment to profits of the parent by $400000(profit) – 40000(add. depreciation)
$360000 reductionThe subsidiary was an independent organization until the date of takeover. So why are you trying to make adjustments to those results achieved before acquisition?
No, no adjustment!
But the asset in the pre acquisition period didnt even exist so how can we allocate depreciation of an asset acquired after that period?
What do you possibly mean – the asset didn’t exist? Of course it existed! The company that became our subsidiary owned it and was depreciating it.
The post-acquisition profits (following depreciation of the asset in the post-acquisition period) are directly comparable to the pre-acquisition profits (following depreciation of the asset in the pre-acquisition period)
Ok?
Yeah but the asset is transfferred from the parent and the subsidiary only owned it in post acquisition period. The parent owned it in pre acquisition period. So how will the subsidiary depreciate it the pre acquisition period. The subsidiary only got the benefit from the asset after acquisition
But the subsidiary had a different asset that it was using in the pre-acquisition period and it was able to scrap that one when it bought the asset from the parent
(Prove to me that that scenario is not a possibility!)
Accept it as a rule – where there is an intra-group asset transfer, this will NOT require adjustment to the time allocation of profits for the year
Ok?
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