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Hello, I had a doubt regarding the PURP on PPE.
So if Parent is the seller:
-The original profit will be taken to (W5) Retained earnings where it will be reduced
-The excess depreciation will be taken to (W2) Net assets of subsidiary where it will be added
-The carrying amount after depreciation will be taken to SFP where it will be reduced from PPE balanceI have two doubts regarding this:
1) Why is the excess depreciation added in W5? Isn’t PURP usually subtracted?
2) If the subsidiary is the seller, what would change in the above three points?Hi,
1) The excess depreciation has been charged, which has increased the depreciation charge from what it previously was. To get the overall depreciation charge back to where it was originally we need to reduce the depreciation. A reduction in expense gives an increase in profit and hence why it is added back in W5. The profit made on the transfer would be deducted.
2) What do you think would change? Have a think, let me know and then we can see if you’re on the right tracks. It’s the best way to learn.
Thanks
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Hello,
Just realized that in Question 1, I meant to say Working 2 and not Working 5, with regards to excess depreciation. Sorry about that!
Also, regarding the subsidiary I think-
-The original profit will be taken to (W5) Retained earnings where it will be added
-The excess depreciation will be taken to (W2) Net assets of subsidiary where it will be reduced
-The carrying amount after depreciation will be taken to SFP where it will be reduced from PPE balanceAm I right? I’m not entirely sure..
Hi,
If the subsidiary is the seller then the initial profit will be made in the subsidiary’s accounts and so would be removed from the retained earnings of the subsidiary. The excess depreciation adjustment will be in the parent’s retained earnings as that is where the new depreciation will have been recorded.
I’d not spend too long looking at this area within the syllabus as it is very rarely examined. If it is then there will be far easier marks elsewhere on the exam paper.
Thanks
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