Purple Ltd sold an item of plant to its subsidiary, Rain Ltd, on 1 January 2022 for $50 000. The asset had cost Purple Ltd $60 000 and had an useful life of 6 years when acquired on 1 January 2020 from an external party. The adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2022 will result in:

Question

Quizplus · Accepted Answer

When an asset is sold from a parent company to its subsidiary, it is considered an intercompany transaction. In the case of Purple Ltd and Rain Ltd, Purple Ltd sold an item of plant to its subsidiary, Rain Ltd, for $50,000. However, in Purple Ltd's books, the item of plant was recorded at a cost of $60,000 on 1 January 2020.

Assuming that both companies have the same year-end of 31 December, the adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2022 will result in a decrease in profit and non-current assets. This is because on consolidation, the item of plant will be eliminated from Purple Ltd's books and added to Rain Ltd's books at its original cost of $60,000. As such, there will be a loss of $10,000 ($60,000 - $50,000) on the transfer of the item of plant from Purple Ltd to Rain Ltd. This loss will be recognized as a decrease in the consolidated profit and a decrease in non-current assets.

Therefore, the correct answer is D) a decrease in current year profit and non-current assets.

Purple Ltd Sold an Item of Plant to Its Subsidiary