Transfers of property, plant & equipment All impacts on the Profit and Loss resulting from the inter-entity sale have been removed Parent Sub Adjustments Group DR CR Balance Sheet EXTRACT Cash (150) 150 0 Machine 150 0 (1) 50 100 Accumulated Depreciation 0 0 (1) 10 10 Deferred Tax Asset (2) 18 18 Income Tax Liability 0 15 15 Profit & Loss EXTRACT Gain on sale of Machine 0 60 (1) 60 0 Depreciation 0 10 10 Gross Profit 0 50 10 Income Tax Expense 0 15 (2) 18 (3) The machine is now recorded at its WDV based on original cost
Depreciable asset transfers – depreciation • The parent (being the purchaser) will depreciate the asset but at different value than the subsidiary would have depreciated Transfers of property, plant & equipment Subsidiary (originally) Parent (now) Diff. WDV at date of transfer 90 150 60 Remaining useful life 9 years 9 years 9 years Dep’n p.a. 10 16.67 6.67 • On consolidation, it is necessary to: – Reduce depreciation - based on the original cost of the asset to the group – Record related tax effect associated with removing the unrealised gain
Transfers of property, plant & equipment In subsequent years the following entry worksheet entry is recorded: DR Retained earnings 42 DR DTA 18 CR Machine 50 CR Accum Dep’n 10 In addition to the above, one year after transfer (30 June 2017) an entry to adjust depreciation is required as follows: DR Accum Dep’n 6.67 CR Dep’n Expense 6.67 DR ITE 2 CR DTA 2 It is the DTA which is credited (not the DTL) as the unrealised profit (and corresponding DTA) is realised through the use of the asset
Transfers of property, plant & equipment In the year ended 30 June 2018 (the second year after the sale) the entries would be as follows: DR Retained earnings 42 DR DTA 18 CR Machine 50 CR Accum Dep’n 10 DR Accum Dep’n 13.34 CR Depreciation Expense 6.67 CR Retained Earnings 6.67 DR ITE 2 DR Retained Earnings 2 CR DTA 4
Intragroup transfers: - inventory becomes plant - plant becomes inventory Topic 3
Transfers between inventory and non-current assets Example: Transfers from inventory to plant • On 1 July 2015, N (parent) Ltd sold an item of machinery to G (subsidiary) Ltd for $9000. This item had cost N Ltd $6000. N Ltd regarded this item as inventory whereas G Ltd intended to use it as a non-current asset . G Ltd charges depreciation at the rate of 10% p.a. on cost. Sales revenue Dr 9 000 Cost of sales Cr 6 000 Machinery Cr 3 000 Deferred tax asset Dr 900 Income tax expense Cr 900 Accumulated depreciation Dr 300 Depreciation expense Cr 300 (10% x $3000 p.a.) Income tax expense Dr 90 Deferred tax asset Cr 90
Transfers between inventory and non-current assets Example: Transfers from plant to inventory On 16 May 2016, Z Ltd sold equipment to N Ltd for $50 000, this asset having a carrying amount at time of sale of $40 000. The equipment was regarded by Z Ltd as a depreciable non-current asset, being depreciated at 10% p.a. on cost, whereas N Ltd records the
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