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Prodigal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Prodigal

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by MikeLittle.
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  • October 27, 2015 at 12:54 pm #279255
    Amit
    Member
    • Topics: 41
    • Replies: 32
    • ☆☆

    (ii) 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.

    profit on transfer of plan (5-4) 1000 / 2.5 remaining life
    depn for 6 month (1000/2.5*6/12) 200

    so Cos should increase by 200 but in video lecture cost of sales increase by 800. i m confused.

    October 27, 2015 at 4:12 pm #279290
    MikeLittle
    Keymaster
    • Topics: 26
    • Replies: 22705
    • ☆☆☆☆☆

    We need to eliminate the unrealised profit of 1,000

    “Prodigal had included the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales.”

    So cost of sales has been reduced by 1,000 unrealised profit whereas the correct charge to cost of sales should be only 200 representing 200 of the 1,000 that has now been used up as a result of the passing of time

    The adjusting entry is therefore to increase cost of sales by 800 (that’s the 1,000 – the 200)

    Is that better?

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