Accounting For Group Structures: Intragroup WORKSHOP EIGHT, WEEK 8

Transactions
WHAT YOU SHOULD BE ABLE TO DO AFTER THIS DISCUSSION
You should be able to:
 Explain the need for making adjustments for intragroup transactions.
 Prepare worksheet entries for intragroup sales of inventory.
 Prepare worksheet entries for intragroup sales of property, plant and equipment.
 Prepare worksheet entries for intragroup services.
 Prepare worksheet entries for intragroup dividends.
 Prepare worksheet entries for intragroup borrowings.
 ACCOUNTING FOR GROUP STRUCTURES: INTRAGROUP TRANSACTIONS
BACKGROUND OF INTRAGROUP TRANSACTIONS : -
Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are
eliminated in full).
Intragroup transactions - transactions that occur between entities in the group
 THE FORMS OF INTRAGROUP TRANSACTIONS: -
 Payment of dividend to a parent entity by the subsidiary;
 Sales of inventory among members of an economic entity;
 Sales of non-current assets among members of an economic entity
 Borrowings between members of an economic entity
 Payment of service fees between members of an economic entity
 INTRAGROUP DIVIDEND:
If dividend is declared but not paid, the following adjustments are made:
 for the entity (Parent) which has recognised dividend revenue (income) and dividend receivable (asset), these entries
have to be reversed for consolidation purposes
 for the subsidiary which has recognised dividend expense (expense) and dividend payable (liability), these entries have
to be reversed for consolidation purposes
 If dividend is paid, the following adjustment are made:
 for the entity (Parent) which has recognised dividend revenue (income received), this entry has to be reversed for
consolidated purposes
 for the subsidiary which has recognised dividend expense (expense paid), this entry has to be reversed for consolidation
purposes
 ACCOUNTING FOR BUSINESS COMBINATIONS AND GROUP STRUCTURES
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP DIVIDEND : -
Reverse the entries for dividend income and dividend expense:
 DR Dividend Revenue and CR Dividend Declared
Reverse the entries for dividend payable and dividend receivable:
 DR Dividend Payable and CR Dividend Receivable
Reverse the entries for dividend received and dividend paid
 DR Dividend Revenue and CR Dividend Paid
INTRAGROUP SALE OF INVENTORY: -
If there is sale of inventory between members of an economic entity, the following must be done:
 Reverse the sales recognised by the seller and cost of goods/sales recognised by the buyer
 Determine unrealised profit if any and increase cost of goods/sales with the amount while reducing inventory with the same amount
 Determine the tax effect of the unrealised profit and recognise deferred tax asset and reduce income tax expense

CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP SALE OF INVENTORY :

Reverse the sale of inventory entries:
 DR Sales and CR Cost of Goods/Sales
Account for unrealised profit:
 DR Cost of Goods/Sales and CR Inventory
Account for tax effect
 DR Deferred tax asset and CR Income tax expense
INTRAGROUP SALES OF PROPERTY, PLANT AND EQUIPMENT (PPE)
If there is sale of property, plant and equipment:
 Determine profit on disposal of PPE and reverse it; Determine the value of PPE to be re-instated; Re-instate accumulated depreciation
 Determine the tax effect associated with profit on disposal; Determine the excess depreciation and its association tax effect
 ACCOUNTING FOR BUSINESS COMBINATIONS AND GROUP STRUCTURES
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP SALES OF PROPERTY, PLANT AND EQUIPMENT (PPE) : -
Reverse the profit on disposal and re-instate accumulated depreciation:
 DR Profit on disposal; DR Asset and CR Accumulated Depreciation
Account for the tax effect associated with profit on disposal
 DR Deferred tax asset and CR Income tax expense
Account for excess depreciation
 DR Accumulated Depreciation and CR Depreciation Expense
Account for the tax effect associated with excess depreciation
 DR Income tax expense and CR Deferred tax asset (Deferred liability)
INTRAGROUP SERVICES FEES : -
If there is service fee paid for service rendered between members of an economic entity, the following must be done:
 Reverse the service revenue and service expense entries
 Reverse the service payable and service receivable entries if the amount is yet to be paid
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP SERVICES FEES
Reverse the entries for service revenue and service expense
 DR Service revenue and CR Service expense
Reverse the entries for service fees receivable and service fees payable
 DR Service fees payable and CR Service fees receivable
INTRAGROUP BORROWINGS
If there exist intragroup borrowings, the following must be done:
 Reverse the entries for intragroup borrowings
 Reverse the entries for interest associated with the borrowing
 ACCOUNTING FOR BUSINESS COMBINATIONS AND GROUP STRUCTURES
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP BORROWINGS: -
Reverse the entries for intragroup borrowings for loan payable and loan receivable:
 DR Payable (loan); CR Receivable (loan)
Reverse the entries for interest associated with the borrowing
 DR Interest Revenue and CR Interest Expense
INTRAGROUP SERVICES FEES : -
If there is a service fee paid for service rendered between members of economic entity, the following must be done:
 Reverse the service revenue and service expense
 Reverse the service payable and service receivable if the amount is yet to be paid
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP SERVICES FEES
Reverse the entries for service revenue and service expense
 DR Service revenue and CR Service expense
Reverse the entries for service fees receivable and service fees payable
 DR Service fees payable and CR Service fees receivable
INTRAGROUP BORROWINGS
If there exist intragroup borrowings, the following must be done:
 Reverse the entries for intragroup borrowings for loan payable and loan receivable
 Reverse the entries for interest associated with the borrowing
CONSOLIDATION ADJUSTMENT ENTRIES FOR INTRAGROUP BORROWINGS
Reverse the entries for loan payable and loan receivable
 DR Loan Payable and CR Loan receivable
Reverse the entries for interest revenue and expense
 DR Interest Revenue and CR Interest Expense
 REVIEW QUESTION ONE
A ltd owns 100 per cent of B ltd which in turn owns 100 per cent of C ltd. During the financial year, A ltd sells inventory to
B ltd at a sale price of $150,000. The inventory cost A ltd $100,000 to produce. Within the same financial year, B ltd
subsequently sells the same inventory to C ltd for $200,000 without incurring any additional costs. At the end of the
financial year, C ltd has sold half of this inventory to companies outside the group for a sale price of $180,000. At year end
C ltd still has half the stock on hand
Required:
From the economic entity’s perspective, determine
a) The sales revenue for the financial year
b) The value of closing inventory
Suggested Solution:
A. Sale revenue for the financial year
 What to do:
1. Establish the group structure and the economic entity
2. Only sales made to external parties relative to the economic entity should suffice
Sales Revenue = $180,000 (external to the group)

B. Value of closing stock

 What to do:
1. Inventory must be valued at the lower of cost and net-realisable value
2. Half of inventory is still at hand from a group perspective
1
Value of inventory = 2 * $100,000 = $50,000
 REVIEW QUESTION TWO
Jacko ltd owns 100% of the shares of Jackson ltd, acquired on 1 July 2018 for a cost $3.5 million when shareholders’ funds of
Jackson were:
$
Share capital 1,750,000
Retained earnings 1,400,000
3,150,000
All assets of Jackson Ltd are fairly stated at acquisition date. The directors believe that there has been an impairment loss on the
goodwill of $35,000 for the year ended 30 June 2019. During the 2019 financial year, Jackson Ltd sells inventory to Jacko ltd at a
sale price of $700,000. The inventory cost Jackson ltd $420,000 to produce. At 30 June 2019, half of the inventory is still on hand
with Jacko ltd. The tax rate is 33%
The financial statement of Jacko ltd and Jackson ltd, as at 30 June 2019, are as follows:
Jacko Company $’000 Jackson Company $’000
Reconciliation of opening and
Closing retained earnings
Sales revenue 4,200 1,400
Less cost of goods sold 1,750 490
Less other expenses 210 105
Other revenue 245 87.5
Profit before tax 2,485 892.5
Tax 700 350
Profit after tax 1,785 542.5
Opening retained earnings 3,500 1,400
5,285 1,942.5
Less dividend declared 700 140
Closing retained earnings 4,585 1,802.5
 REVIEW QUESTION TWO
The financial statement of Jacko ltd and Jackson ltd, as at 30 June 2019, are as follows:
Jacko Company $’000 Jackson Company $’000
Statement of financial position
Shareholders’ funds
Retained earnings 4,585 1,802.5
Share capital 14,000 1,750
Current Liabilities
Accounts payable 350 297.5
Non-current liabilities
Loan 2,100 875
21,035 4,725
Assets
Cash 875 87.5
Account receivable 525 612.5
Inventory 2,100 1,050
Non-current assets
Land 5,040 1,400
Plant 8,645 1,400
Investment in Small company 3,500 -
Future income tax benefit 350 175
Goodwill
21,035 4,725
Required:
Provide the consolidated financial statements for Jacko ltd and its controlled entity for 2019
 REVIEW QUESTION TWO
What to do:
1. determine group structure and calculate for goodwill on the date of acquisition (if any)
2. Pass adjusting entries for consolidation
a) Elimination of investment cost/pre-acquisition reserve
b) Impairment loss on goodwill (if any)
c) Eliminate intra-group transaction
(sale of inventory)
(Unrealised profit associated with sale of inventory if any)
(opening and closing stock of inventory adjustments)
(deferred tax effect)
(dividend declared/paid)
Workings:
Goodwill/Gain on Purchased bargain on acquisition date - 1/07/2018
F.V. of P.C. = $3,500,000 F.V. of I.N.A. = $1,750,000 + $1,400,000 = $3,150,000
Goodwill = $350,000
 REVIEW QUESTION TWO

What to do:
Workings:
1
Unrealised Profit = *($700,000 – $420,000) = $140,000
2

Deferred tax asset (tax effect) = 0.33*$140,000 = $46,200

1. Eliminate investment cost/pre-acquisition reserve

Dr Share Capital $1,750,000
Dr Retained Earnings $1,400,000
Dr. Goodwill $350,000
Cr. Investment Cost $3,500,000
 REVIEW QUESTION TWO

What to do:
2. Eliminate dividend income/expense
Parent and Subsidiary
Dr Profit & loss $140,000
Cr Dividend Paid $140,000
3. Recognise impairment of goodwill (35,000)
Dr Impairment loss $35,000
Cr. Acc. impairment $35,000
4. Adjust for intra-group sale of inventory (Jackson to Jacko)
Dr Sales revenue $700,000
Cr. Cost of goods sold $700,000
5. Adjust for unrealized profit on intra-group sale of inventory
Dr. Cost of goods sold $140,000
Cr. Inventory $140,000
6. Adjust for deferred tax on unrealized profit on intra-group sale of inventory
Dr Deferred tax asset $46,200
Cr. Income tax expense $46,200
 REVIEW QUESTION TWO
Consolidation Worksheet
Jacko Ltd Jackson Ltd Eliminations and adjustments Consolidated statement
Dr Cr
$000 $000 $000 $000 $000
Reconciliation of opening & closing retained earnings
Sales revenue 4 200 1 400 7004 4 900
less Cost of goods sold (1 750) (490) 1405 7004 (1 680)
less Other expenses (210) (105) 353 (350)
Other revenue 245 87.5 1402 192.5
Profit 2 485 892.5 3062.5
Tax expense 700 350 46.26 1003.8
Profit after tax 1 785 542.5 2 058.7
Retained earnings 1 July 2018 3 500 1 400 1 4001 3 500
5 285 1 942.5 5 558.7
Dividends paid 700 140 1402 700
Retained Earnings 30th June 2019 4 858.7
Statement of financial position
Shareholders’ equity
Retained earnings 30 June 2019 4 585 1 802.5 4 858.7
Share capital 14 000 1 750 1 7501 14 000
Current liabilities
Accounts payable 350 297.5 647.5
Non-current liabilities
Loans 2 100 875 2 975
21 035 4 725 22 481.2
Current assets
Cash 875 87.5 962.5
Accounts receivable 525 612.5 1 137.5
Inventory 2 100 1 050 1405 3 010
Non-current assets
Land 5 040 1 400 6 440
Plant 8 645 1 400 10 045
Investment in Jackson Ltd 3 500 — 3 5001 —
Deferred tax asset 350 175 46.26 571.2
Goodwill — — 3501 350
Accumulated impairment loss—goodwill 353 (35)
21 035 4 725 4 561.2 4 561.2 22 481.2
 REVIEW QUESTION TWO

Consolidated statement of financial position of Jacko Ltd and its controlled entities as at 30 June 2019
The Group Jacko Ltd
($000) ($000)
Current assets
Cash 962.5 875
Accounts receivable 1 137.5 525
Inventory 3 010 2 100
5 110 3 500
Non-current assets
Land 6 440 5 040
Plant and equipment 10 045 8 645
Investment in Jackson Ltd – 3 500
Future income tax benefit 571.2 350
Goodwill 350 –
Accumulated impairment loss—goodwill (35) –
17 371.2 17 535
Total assets 22 481.2 21 035
Current liabilities
Accounts payable 647.5 2 500
Dividend payable 2 975 175
Total liabilities 3 622.5 2 675
Shareholders’ equity
Share capital 14 000 1 250
Retained earnings 4 858.7 4 200
Total shareholders’ equity 18 858.7 5 450
Total equities 22 481.2 8 125
 REVIEW QUESTION TWO

Abridged consolidated statement of profit or loss and other comprehensive income of Jacko Ltd and its controlled entities
for the year ended 30 June 2019
The Group Jacko Ltd
($000) ($000)
Sales revenue 4 900 4 200
Cost of goods sold (1 680) (1 750)
Other expenses (350) (210)
Other revenue 192.5 245
Profit before tax 3 062.5 2 485
Income tax expense (1 003.8) (700)
Profit for the year 2 058.7 1 785
Other comprehensive income – –
Total comprehensive income for the year 2 058.7 1 785

Jacko Ltd and its controlled entity

Consolidated statement of changes in equity for the year ended 30 June 2019
Share capital Group retained earnings Group total equity
($000) ($000) ($000)
Balance at 1 July 2018 14 000 3 500 17 500
Total comprehensive income for the year 2 058.7 2 058.7
Distributions—dividends (700) (700)
Balance at 30 June 2019 14 000 48 58.7 18 858.7
 REVIEW QUESTION THREE
Big company owns all the issued capital of Small Company. Big company acquires its 100 per cent interest in Small company on 1 July
2018 for a cost $2,000. All assets are fairly stated at acquisition date. The share capital
$
Share capital 1,250
Retained earnings 750
2,000
The reconciliation of retained earnings and statement of financial positions of Big Company and Small Company, as at 30 June 2019,
are as follows:
Big Company $ Small Company $
Reconciliation of opening and Closing retained earnings
Profit before tax 500 250
Tax 125 100
Profit after tax 375 150
Opening retained earnings 1,000 750
1,375 900
Less dividend declared 175 125
Closing retained earnings 1,200 775
Statement of financial position
Shareholders’ funds
Retained earnings 1,200 775
Share capital 1,250 1,250
Liabilities
Accounts payable 2,500 250
Dividends payable 175 125
5,125 2,400
 REVIEW QUESTION THREE
Big Company $ Small Company $
Assets
Cash 250 175
Account receivable 125 325
Dividend receivables 250
Inventory 375 400
Plant and Equipment 2,125 1,500
Investment in Small company 2,000 -
5,125 2,400

Required:
Provide the consolidated statement of profit or loss and other comprehensive income, statement of financial position and the
statement of changes in equity for Big Company and its controlled entity for the year ending 30 June 2019
 REVIEW QUESTION THREE
What to do:
1. determine group structure and calculate for goodwill on the date of acquisition (if any)
2. Pass adjusting entries for consolidation
a) Elimination of investment cost/pre-acquisition reserve
b) Impairment loss on goodwill (if any)
c) Eliminate intra-group transaction (In this case dividend proposed)
Workings:
Goodwill/Gain on purchased bargain on acquisition date - (1/07/2018):
F.V. of P.C = $2,000 F.V. of I.N.A = $1250 + $750 = $2000 No goodwill

 What to do:
1. Eliminate investment cost/pre-acquisition reserve
Dr Share Capital $1,250
Dr Retained Earnings $750
Cr. Investment Cost $2,000

2. Eliminate dividend income/expense

Parent and Subsidiary
Dr Profit & loss $125 Dr. Dividend payable $125
Cr Dividend Proposed $125 Cr. Dividend receivable $125
 REVIEW QUESTION THREE
Consolidation Worksheet
Big Company Small Company Eliminations and adjustments Consolidated statement
Dr Cr
Abridged statement of profit or loss and other
comprehensive income
Profit before tax 500 250 1252 625
Tax 125 100 (225)
Profit after tax 375 150 400
Opening retained earnings 1000 750 7501 1000
1375 900 1400
less Dividends proposed 175 125 1252 (175)
Retained earning 1225
Statement of financial position
Shareholders’ funds
Retained earnings 1200 775 1225
Share capital 1250 1250 12501 1250
Liabilities
Accounts payable 2500 250 2750
Dividends payable 175 125 1253 175
Total Equity & Liabilities 5125 2400 5400
Assets
Cash 250 175 425
Accounts receivable 125 325 450
Dividends receivable 250 — 1253 125
Inventory 375 400 775
Plant and equipment 2125 1500 3625
Investment in Small Company 2000 — 20001 —
Total Assets 5125 2400 2250 2250 5400
 REVIEW QUESTION THREE
Consolidated statement of financial position of Big Company and its controlled entities as at 30 June 2019
The Group Big Company
($) ($)
Current assets
Cash 425 250
Accounts receivable 450 125
Dividends receivable 125 250
Inventory 775 375
1775 1000

Non-current assets
Plant and equipment 3625 2125
Investment in Small Company - 2000
3625 4125
Total assets 5400 5125
Current liabilities
Accounts payable 2750 2500
Dividend payable 175 175
Total liabilities 2925 2675
Shareholders’ equity
Share capital 1250 1250
Retained earnings 1225 1200
Total shareholders’ equity 2475 2450
Total equities 5400 5125
 REVIEW QUESTION THREE
Abridged consolidated statement of profit or loss and other comprehensive income of Big Ltd and its controlled entities
for the year ended 30 June 2019
The Group Big Company
($) ($)
Profit before tax 625 500
Income tax expense (225) (125)
Profit for the year 400 375
Other comprehensive income – –
Total comprehensive income for the year 400 375

Big Ltd and its controlled entity

Consolidated statement of changes in equity for the year ended 30 June 2019
Share capital Group retained earnings Group total equity
Balance at 1 July 2018 1250 1000 2250
Total comprehensive income for the year 400 400
Distributions—dividends (175) (175)
Balance at 30 June 2019 1250 1225 2475
 REVIEW QUESTION FOUR
Bigger company owns all the issued capital of Smaller Company. The financial statements of Bigger company and Smaller company at 30 June 2019 are as
follows:
Bigger Company $ Smaller Company $
Reconciliation of opening and Closing retained earnings
Profit before tax 500 500
Tax 125 200
Profit after tax 375 300
Opening retained earnings 4,000 1,500
4,375 1,800
Less dividend declared 175 250
Closing retained earnings 4,200 1,550

Statement of financial position

Shareholders’ funds
Retained earnings 4,200 1,550
Share capital 1,250 2,500
Liabilities
Accounts payable 2,500 500
Dividends payable 175 250
8,125 4,800
Assets
Cash 250 350
Account receivable 125 650
Dividend receivables 250
Inventory 375 800
Plant and Equipment 2,125 3,000
Investment in Small company 5,000 -
8,125 4,800
 REVIEW QUESTION FOUR
Bigger company acquired its 100 per cent interest in Smaller Company on 1 July 2018 for a cost of $5,000. The share capital and
reserves of Smaller on the date of acquisition are:
$
Share capital 2,500
Retained earnings 1,500
The directors believe that goodwill has been impaired by 20% in the year to 30 June 2019.

Required:
Provide the consolidated statement of profit or loss and other comprehensive income and the statement of financial position for
Bigger Company and its controlled entity for the year ending 30 June 2019
 REVIEW QUESTION FOUR
What to do:
1. determine group structure and calculate for goodwill on the date of acquisition (if any)
2. Pass adjusting entries for consolidation
a) Elimination of investment cost/pre-acquisition reserve
b) Impairment loss on goodwill (if any)
c) Eliminate intra-group transaction (sale of non-current asset; deferred tax effect; depreciation reduction)
Workings:
Goodwill/Gain on Purchased bargain 1/07/2018
F.V. of P.C. = $5,000 F.V. of I.N.A. = $2,500 + $1,500 = $4,000 Goodwill = $1000

What to do:
1. Eliminate investment cost/pre-acquisition reserve
Dr Share Capital $2,500
Dr Retained Earnings $1,500
Dr. Goodwill $1,000
Cr. Investment Cost $5,000

2/3. Eliminate dividend income/expense

Parent and Subsidiary
Dr Profit & loss $250 Dr. Dividend payable $250
Cr Dividend Proposed $250 Cr. Dividend receivable $250

4. Recognise impairment of goodwill (0.2*1,000)

Dr Impairment loss $200
Cr. Acc. impairment $200
 REVIEW QUESTION FOUR
Consolidation Worksheet
Bigger Company Smaller Company Eliminations and adjustments Consolidated statement
Dr Cr
Statement of profit or loss and other comprehensive income and
reconciliation of retained earnings
Profit before tax 500 500 2502 550
2004
Tax 125 200 325
Profit after tax 375 300 225
Opening retained earnings 4000 1500 15001 4000
4375 1800 4225
less Dividends proposed 175 250 2502 (175)
Statement of financial position
Shareholders’ funds
Retained earnings 4200 1550 4050
Share capital 1250 2500 25001 1250
Liabilities
Accounts payable 2500 500 3000
Dividends payable 175 250 2503 175
8125 4800 8475
Assets
Cash 250 350 600
Accounts receivable 125 650 775
Dividends receivable 250 — 2503 —
Inventory 375 800 1175
Plant and equipment 2125 3000 5125
Investment in Smaller Company 5000 — 50001 —
Goodwill — — 10001 1000
Accumulated impairment loss 2004 (200)
8125 4800 5700 5700 8475
 REVIEW QUESTION FOUR
Consolidated statement of financial position of Bigger Company and its controlled entities as at 30 June 2019
The Group Bigger Company
($) ($)
Current assets
Cash 600 250
Accounts receivable 775 125
Dividends receivable - 250
Inventory 1175 375
2550 1000
Non-current assets
Plant and equipment 5125 2125
Investment in Small Company 5000
Goodwill 1000
Accumulated impairment loss—goodwill (200) -
5925 7125
Total assets 8475 8125
Current liabilities
Accounts payable 3000 2500
Dividend payable 175 175
Total liabilities 3175 2675
Shareholders’ equity
Share capital 1250 1250
Retained earnings 4050 4200
Total shareholders’ equity 5300 5450
Total equities 8475 8125
 REVIEW QUESTION FOUR
Abridged consolidated statement of profit or loss and other comprehensive income of Bigger Ltd and its controlled entities for the year
ended 30 June 2019
The Group Bigger Company
($) ($)
Profit before tax 550 500
Income tax expense (325) (125)
Profit for the year 225 375
Other comprehensive income – –
Total comprehensive income for the year 225 375

Bigger Ltd and its controlled entity

Consolidated statement of changes in equity for the year ended 30 June 2019

Share capital Group retained earnings Group total equity

Balance at 1 July 2018 1250 4000 5250
Total comprehensive income for the year 225 225
Distributions—dividends (175) (175)
Balance at 30 June 2019 1250 4050 5300
 REVIEW QUESTION FIVE
Bernie Boffin ltd owns 100 per cent of Computer ltd. On 1 July 2017 Bernie Boffin ltd sells an item of plant to Computer ltd for $3.6
million. This plant cost Bernie Boffin ltd $4.5 million and had accumulated depreciation of $1.8 million at the date of the sale. The
remaining useful life of the plant is assessed as 12 years and the tax rate is 33%
Required:
Provide the consolidation journal entries for 30 June 2018 and 30 June 2019 to adjust for the above sales
Suggested Solution:
What to do:
1. reverse profit associated with disposal (be mindful of the direction of sales – Parent to subsidiary) – Profit resides in the parent’s
account
2. adjust for the tax effect associated with reversal of disposal profit
3. adjust for the excess depreciation charged for disposed asset
4. adjust for the tax effect associated with excess depreciation
Workings:
Profit on disposal = Selling price – (Cost of asset – Accumulated depreciation)
Profit on disposal = $3,600,000 – ($4,500,000 - $1,800,000) = $900,000
Deferred tax asset (Tax effect) = 0.33*$900,000 = $297,000
Excess depreciation: Parent/Group Subsidiary
4,500,000 −1,800,000 3,600,000
Depreciation 12
= $225,000 12
= $300,000
Excess depreciation = $300,000 - $225,000 = $75,000
Deferred tax liability (tax effect) = 0.33*$75,000 = $24,750
 REVIEW QUESTION FIVE
What to do:
2018
1. reverse profit associated with disposal (be mindful of the direction of sales
– Parent to subsidiary) – Profit resides in the parent’s account
Dr. Profit on disposal – PPE $900,000
Dr. Plant $900,000
Cr. Accumulated Dep. $1,800,000
2. Tax effect associated with reversal of disposal profit
Dr. Deferred tax asset $297,000
Cr. Income tax expense $297,000
3. adjust for the excess depreciation charged for disposed asset
Dr. Accumulated Dep. $75,000
Cr. Depreciation Exp. $75,000
4. adjust for the tax effect associated with excess depreciation
Dr. Income tax expense $24,750
Cr. Deferred tax asset $24,750
 REVIEW QUESTION FIVE
What to do:
2019
1. Adjust the opening balance of retained for the profit on disposal
Dr. Retained Earnings (1/07/2018) $603,000
Dr. Deferred tax asset $297,000
Dr. Plant $900,000
Cr. Accumulated Dep. $1,800,000
2. adjust for the excess depreciation charged for disposed asset – current and prior period
Dr. Accumulated Dep. $150,000
Cr. Retained Earning $75,000
Cr. Depreciation Exp. $75,000
3. adjust for the tax effect associated with excess depreciation – current and prior period
Dr. Income tax expense $24,750
Dr. Retained Earnings $24,750
Cr. Deferred tax asset $49,500