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Hi Mr Mike Little,
This is specifically relating to Q 1 June 2011 exam.
Prodigal transferred a plant to the subsidiary Sentinel immediately after the acquisition. The transfer price is 5 million at cost of 4 million. So why don’t we adjust the group revenue and cost of sales by both 5 million? But only with the unrealised profit on the transfer, ie 1 million, as well as the difference of depreciation?
Thank you.
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Hi Sir,
I looked up the text book when I got home and found out the related instructions on intra-group asset transfer procedures. So I’m understanding my original question now. But what I do not understand is why the depreciation adjustment falls on the intra-group asset transferring is not taken to the calculation of post acquisition profits of Sentinel.
My working was increase the profit of Sentinel by 1000 (5 million value / 2.5 years of depreciation * 6/12 post acquisition period); and decrease the profit of Prodigal by 800 (4 million value / 2.5 years of depreciation * 6/12 post acquisition period).
Why the answer provided by the Examiner is only to adjust the difference of depreciation by increase the profit on the Prodigal?
Thank you!
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Hi Sir,
Could you help me understand my question two? Thank you.
I’ve already typed out a complete answer to this! Where’s it gone?
Until relatively recently it was accepted that we eliminate the profit on the transfer from the selling company and we adjust for the excess depreciation charge in the records of the buying company
But then it changed.
The thinking now is that, when an asset is transferred, a profit is accounted for, but it’s an unrealised profit. That profit becomes realised by the passage of time so, as each year goes by, an appropriate proportion of that profit is realised. And that realised proportion is equal to the excess depreciation that is charged by the buying company
So nowadays we make the FULL net adjustment in the records of the selling company
OK?
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So you mean if the transferring is done from subsidiary to the parent, the unrealised profit (aka the excessive depreciation) is adjusted on the profits of the subsidiary?
Thank you.
“the unrealised profit (aka the excessive depreciation)” – not sure what you mean by this but the pup ie the profit on the transfer as adjusted for the excess depreciation is adjusted in the selling company – in your question, the subsidiary
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OK, got it now. Thanks.
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