Happy Ltd holds a 60% interest in Valley Ltd. On 1 July 2018 Valley Ltd sold a depreciable non-current asset to Happy Ltd at a profit before tax of $10 000. The remaining useful life of the asset at the date of sale was 4 years and the tax rate is 30%. The impact of the above on the NCI share of profit for the year ended 30 June 2019 is:
A) debit $2800.
B) credit $2800.
C) debit $2100.
D) credit $2100.

Question

Quizplus · Accepted Answer

The profit on sale of the asset needs to be eliminated in full from the group's perspective, including the non-controlling interest's (NCI) share of the profit. The profit before tax was $10,000, and the asset had a remaining useful life of 4 years, so the annual depreciation on the intra-group profit is $10,000 / 4 = $2,500. The tax effect at 30% is $2,500 * 30% = $750, reducing the annual impact to $2,500 - $750 = $1,750. The NCI's share is 40% (100% - 60% ownership by Happy Ltd), so the impact on the NCI share of profit is 40% of $1,750 = $700. However, since the question asks for the impact for the year ended 30 June 2019, which is one year after the sale, we need to consider the full year's impact, making the correct calculation for the NCI share $700. The options provided do not directly match this calculation, suggesting a possible misunderstanding in the calculation process. Given the options, the closest correct approach involves recognizing the need to adjust for the NCI's share of the profit elimination, but none of the provided options accurately reflects the correct calculation based on the information given. Therefore, a reevaluation of the calculation process is necessary, focusing on the profit elimination and its tax effect, and how it impacts the NCI's share of profit.

Happy Ltd Holds a 60% Interest in Valley Ltd