On 1 January 20X7, an 85% subsidiary of AB sold a leasehold interest in a property to a bank for Rs.110 million. The property was carried in the financial statements at Rs.85 million and the remaining term of the lease was 18 years from 1 January 20X7. The subsidiary has the option to repurchase the leasehold interest on 31 December 20X7 for Rs.136 million or on 31 December 20X8 for Rs.1302 million. The subsidiary is obliged to repurchase the interest on 31 December 20X9 for Rs.129 million if not repurchased before. The early repurchase option was not exercised on 31 December 20X7. Your assistant has credited the sales proceeds to a suspense account that is included in current liabilities. In previous years, the leasehold property has been amortized over the lease term with the amortization expense included in cost of sales. However, no amortization charge has been made for 20X7 on the grounds that the leasehold interest has been disposed of on the first day of the year.

Required:

Explain the adjustments that would be required to correctly reflect this transaction in the consolidated financial statements of AB for the year ended 31 December 20X7. You should provide appropriate journal entries to support your adjustment

Question 1 (marks 10) On 1 January 20x7, an 85% subsidiary of AB sold a leasehold interest in a property to a bank for Rs.110 million. The property was carried in the financial statements at Rs.85 million and the remaining term of the lease was 18 years from 1 January 20x7. The subsidiary has the option to repurchase the leasehold interest on 31 December 20x7 for Rs.136 million or on 31 December 20x8 for Rs.1302 million. The subsidiary is obliged to repurchase the interest on 31 December 20x9 for Rs. 129 million if not repurchased before. The early repurchase option was not exercised on 31 December 20x7. Your assistant has credited the sales proceeds to a suspense account that is included in current liabilities. In previous years, the leasehold property has been amortized over the lease term with the amortization expense included in cost of sales. However, no amortization charge has been made for 20x7 on the grounds that the leasehold interest has been disposed of on the first day of the year. Required: Explain the adjustments that would be required to correctly reflect this transaction in the consolidated financial statements of AB for the year ended 31 December 20x7. You should provide appropriate journal entries to support your adjustment. (10 marks)