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Hello Sir. Kindly explain how to proceed for the adjustment and entries required for the transfer of the plant..(question 142 from bpp revision kit)=>
Immediately after the acquisition of S on 1 october 20×0, P transferred an item of plant with a carrying amount of $4 million to S at an agreed value of $ 5 million. At this date the plant had a remaining life of 2.5 years. P had included the profit on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of sales.
(note: NCI= 25 % and year end= 31 March 20×1)So P has put through the journal entry:
Dr Cash $5 million
Cr Cost of Sales $1 million
Cr Asset Account $4 millionWhat SHOULD have happened is:
Dr Cash $5 million
Cr Asset Account $4 million
Cr Gain on asset disposal (statement of profit or loss) $1 millionTo get from the bad entry to the correct entry, we need to:
Dr Cost of Sales $1 million
Cr Gain on disposal $1 millionBut now we have the problem of eliminating the pup of $1 million and adjusting for the excess depreciation that will have been charged by the subsidiary 6/30 * $1 million
Both these adjustments are in the seller’s records so, in P’s records:
Dr Gain on Sale (so debit Retained Earnings) $1 million
Cr Asset Account $1 millionand
Dr Asset Account $200,000
Cr Cost of Sales $200,000 (thereby increasing retained earnings)being the overcharge of depreciation calculated on the inflated intra-group transfer price of the asset
The net adjustment to put through having corrected the incorrect treatment from the question is therefore:
Dr Retained Earnings $800,000
Cr Asset Account $800,000OK?
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