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ACCA Strategic Professional · Strategic Business Reporting (International) · Group accounting including statements of cash flows

Parent R sold a machine with a carrying amount of $60,000 to its 90% subsidiary T for $80,000 during the year. The machine has a remaining life of 4 years from the date of sale, depreciated straight line, with a full year's charge in the year of sale. What is the net effect on consolidated profit before tax for the year of the adjustment for this transfer?

Consolidated profit before tax falls by $15,000. The $20,000 intragroup gain on transfer is eliminated, but the $5,000 of excess depreciation charged by the subsidiary on the inflated cost is added back. Net of these two adjustments, the decrease is $15,000.

  1. ADecrease of $15,000Correct
  2. BDecrease of $20,000
  3. CDecrease of $25,000
  4. DDecrease of $5,000

Explanation

R recorded a $20,000 profit that is unrealised in the group, so it is eliminated. T's depreciation is based on $80,000 over 4 years, $20,000, versus $15,000 on the original carrying amount, so excess depreciation of $5,000 is reversed. Net effect is -20,000 + 5,000 = -$15,000.

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