A Ltd sells to its subsidiary, J Ltd, an item of inventories on 1 January 2017 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 2017 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, it should be accounted for as a non-current asset (plant) rather than an inventory item. Therefore, the entry should be to reduce (credit) the Inventories account and increase (debit) the Plant account for $3,000. This adjustment reflects the cost of the inventory item being transferred to J Ltd as a non-current asset.

A Ltd Sells to Its Subsidiary, J Ltd, an Item