P Ltd sold an item of property,plant and equipment to its subsidiary S Ltd on the following basis: cost to P Ltd $24 000.The equipment is three years old and had been depreciated at 10% per annum straight line.Sale price was $20 000.The gain recorded by P Ltd on sale would be:

Question

Quizplus · Accepted Answer

The gain on sale of the equipment can be calculated by subtracting the net book value (NBV) from the sale price.

NBV = Cost - Accumulated Depreciation

Cost = $24,000 
Accumulated Depreciation = 10% * $24,000 * 3 years = $7,200

NBV = $24,000 - $7,200 = $16,800

Gain on sale = Sale Price - NBV 
Gain on sale = $20,000 - $16,800 = $3,200

However, since the sale was made to its subsidiary S Ltd, the gain needs to be adjusted for any unrealized profit in the inventory of the subsidiary. If S Ltd still holds the equipment, the gain on sale should be deferred until the equipment is sold to an external party.

P Ltd Sold an Item of Property,plant and Equipment to Its