Question

Black Ltd owns 100% of Canary Ltd.

At 1 July 2016, Black Ltd sold an item of plant to Canary Ltd for $210 000.

Black Ltd had originally paid $400 000 for the plant on 1 July 2014, when it had an expected useful life of 8 years.

The tax rate is 30%.

(a)  To eliminate the gain or loss on sale of the asset for the year, the group accountant processes the following entry in the consolidation worksheet:

Dr Gain on sale           $210 000

           Cr Plant                     $210 000

Do you agree this treatment will eliminate the gain or loss for the year ending 30 June 2016? If so, why? If not, provide both an explanation of why not and the correct treatment.  

(b)  The group accountant is unsure of what depreciation expense should be shown for the group in relation to this asset for the year ending 30 June 2017.

Provide an explanation to the group accountant of the depreciation expense that should be shown for the group and why this is the case.

Note: no marks awarded if no explanation as to "why" given!

(c)  Provide all consolidation/elimination entries related to this transaction for the year ending 30 June 2019 (space provided on page 7).

Note: journal must be presented in a professional manner (workings can be shown below)

Answer 1

(A) The asset was purchased on 01.07.2014 and sold on 01.07.2016.Black limited has used the machinery for 2 years

So wdv of asset on 01.07.2016 is

Cost - accumulated depreciation

400000 -(400000/8)*2 = $ 300,000

So if sale price is $ 210,000

Then there is loss of $ 300000 - 210000 =$ 90,000

The loss of $ 90000 is to be nullified in books as inter company transaction took place and no actual loss has been born by the group. In consolidated books asset must be shown at its original carrying value. So loss should be adjusted during the remaining life of asset i e 6 years so Depreciation should be increased each year by $ 90000/6 = $ 15000

So consolidated entry must be recorded as

equipment a/c dr. 90000

Depreciation a/c dr. 15000

Accumulated Depreciation 15000

Loss on sale 90000

B) the depreciation expense for the group is $ 50000 i.e $ 35000 will be booked by subsidiary and $ 15000 through adjustment entry. The asset must be carried out at its original carrying value as the asset is within the group and no actual loss has been born.

C) The adjustment entry required to be posted is

Depreciation a/c dr. $15000

To accumulated depreciation $ 15000