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