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Sir, please assist with the solution to this MCQ. The answer is Nil and I cannot figure out how/why.
When a subsidiary sold some PPE to the parent half way through this year, the carrying value of the plant was $750,000 and the transfer price was $820,000. Whilst the subsidiary owned the plant, it was being depreciated on a straight line basis over its remaining estimated useful life of 7 years. However, on the sale to the parent , the estimate of remaining useful life was revised to just 5 years. It is group policy to charge a full year’s depreciation charge in the year of purchase and none in the year of sale.
What is the adjustment in the records of the parent for the purposes of the consolidation?
Because the adjustment for the unrealised profit (and for the excess depreciation charge) is made in the records of the selling company – in this case, in the subsidiary’s records.
The question asks for the adjustments in the parent’s records, so the answer is “Nil”
OK?
Thank you sir. I get it now. If it the question had been adjustment in subsidiary books, then it would have been:
URP of 70,000 – 14,000(excess depreciation) = 56,000.
Thank you.
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