A Ltd sells to J Ltd an item of inventory on 1 January 20X3 for $6 000. The item cost A Ltd $3 000 earlier in the current year. J Ltd intends to use the item as plant with a useful life of 10 years, and no estimated salvage value. A straight-line depreciation rate of 10% p.a. is applicable. The tax rate is 30%. The worksheet entry for the year ended 30 June 20X3 would include the following adjustment:

Question

Quizplus · Accepted Answer

Since J Ltd intends to use the item as plant with a useful life of 10 years, the item should be reclassified from inventory to plant. Therefore, the entry required is to credit Inventory (the original cost of the item) and debit Plant (the same amount). The adjustment entry should be:
DR Plant $3,000
CR Inventory $3,000

A Ltd Sells to J Ltd an Item of Inventory