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In: Accounting

As with inventory, if a subsidiary sells a non-current asset, such as an item of property,...

As with inventory, if a subsidiary sells a non-current asset, such as an item of property, plant and equipment, to another entity within the group, to the extent that the asset stays within the group, the gain or loss on sale has not been recognised from the group's perspective and the non-controlling interests' share of profits will ___________________

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Expert Solution

As with inventory, if a subsidiary sells a non-current asset, such as an item of property, plant and equipment, tpo another entity within the group, to the extent that the asset stays within the group, the gain or loss on sale has not been recognised from the group's perspective and the non-controlling interest's share of profits will decrease (in case of gain on sale) or increase (in case of loss on sale).

Example : A Ltd. owns 60% of B Ltd. Suppose B Ltd. sold non-current asset to A Ltd. after acquisition date at a price of $50,000 while the value of non-current asset in the books of B Ltd. was $45,000. Therefore, B Ltd. had made a profit of $5,000 (50,000 - 45,000) on this transaction. Suppose at the year end, A Ltd. charged depreciation of $6,000 on the non-current asset and of which $600 relates to the depreciation charged on the profit portion of $5,000. Therefore, at the year end we have to remove the unrealised profit of $4,400 (5,000 - 600) from B Ltd. current year profit. Therefore, non-controlling interests' share of profit will reduce by $1,760 (4,400 * 40%).

Similarly, if B Ltd. had sold non-current asset to A Ltd. at a price which is below the book value, then in this case non-controlling interest's share of profits will increase.


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