A Ltd sold an item of plant to its subsidiary, B Ltd, on 1 January 2017 for $25 000. The asset had cost A Ltd $30 000 and had an useful life of 6 years when acquired on 1 January 2015 from an external party. The adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2018 will result in:

Question

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- When A Ltd sold the plant to its subsidiary B Ltd, it had a carrying amount on A Ltd's books of $25,000 (cost of $30,000 less accumulated depreciation of $5,000). 
- The sale between related parties is considered a transfer at cost and no gain or loss is recognized. So, B Ltd records the plant at $25,000 on its books as well.
- However, on consolidation, the intercompany sale needs to be eliminated to avoid double counting of the asset. 
- This means that A Ltd will need to remove the asset from its books, resulting in a decrease in retained earnings (by the amount of gain/loss on sale, which is zero in this case). 
- At the same time, B Ltd will also need to remove the asset from its books, resulting in an increase in its net income (by the amount of depreciation expense for the period, which would have been charged to expense if the transaction had not occurred). 
- Therefore, the adjustment necessary on consolidation will result in a decrease in retained earnings for A Ltd and an increase in current year profit for B Ltd. Overall, this leads to a decrease in consolidated net income, but the question asks about the effect on A Ltd and B Ltd separately.

A Ltd Sold an Item of Plant to Its Subsidiary