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Immediately after the acquisition of Sentinel on 1 October 2010, Prodigal transferred an item of plant with a
carrying amount of $4 million to Sentinel at an agreed value of $5 million. At this date the plant had a remaining
life of two and half years. Prodigal had included the profit on this transfer as a reduction in its depreciation costs.
All depreciation is charged to cost of sales.
I don’t know how to solve this please help….There are 2 adjustments required to COS from this note.
1. The gain on sale of the plant $5m – $4m = $1m,
The gain has been credited to COS so needs to be added back as you need to take any inter-company transactions out.
2. Overcharge of depreciation through Sentinel, as it is now being calculated on $5m instead of original cost of $4m. If the plant had been kept by Prodigal it would include depreciation in SOCI, calculated as $4m/30 mnths x 6 mnths to 31 March = $800k. Whereas in Sentinel it is calculated as $5m/30 mnths x 6 mnths = $1m. Difference of $200k needs to be deducted from COS so position shown is as it would have been it no transfer had occurred.
Hope this makes sense.
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