Clovelly Ltd owns 25% of Bronte Ltd. Bronte's profit after tax for the year ended 30 June 20X5 is £30 000. The tax rate is 30%. On 1 July 20X3, Bronte Ltd sold an item of plant to Clovelly Ltd for £8000. The carrying amount of the asset on this date in Bronte Ltd's records was £3000. The plant had a remaining useful life of 5 years. Clovelly's share of Bronte's profit for the year ended 30 June 20X5 is:

Question

Quizplus · Accepted Answer

Clovelly Ltd's share of Bronte's profit is calculated as follows: Bronte's profit after tax is £30,000. Clovelly owns 25% of Bronte, so its share of the profit is 25% of £30,000 = £7,500. However, we must adjust for the intra-group sale of the plant. The profit on sale from Bronte's perspective is £8,000 - £3,000 = £5,000. This profit is not realized from the group's perspective until the asset is sold outside the group. Since the asset has a remaining useful life of 5 years, the annual depreciation on the profit element is £5,000 / 5 = £1,000. As Clovelly owns 25% of Bronte, it must eliminate 25% of this unrealized profit from its share of Bronte's profit, which is 25% of £1,000 = £250. Therefore, Clovelly's adjusted share of Bronte's profit is £7,500 - £250 = £7,250. However, the correct calculation for the depreciation should consider the entire year, and the initial calculation of the share of profit before adjusting for the intra-group sale was correct. The error was in the final adjustment, leading to the correct answer being £7,675, not £7,250 as initially miscalculated.

Clovelly Ltd Owns 25% of Bronte Ltd