P owns 100% of S. At the beginning of Year 1 P buys a machine for $80,000 and

immediately sells it to 5 for $100,000. The group depreciates plant over five years

using the straight line method. (Residual value = $0.)

When the consolidated financial statements for Year 1 are prepared there are two

problems:

- P has made a profit of $20,000, but from the point of view of the group, this is

unrealised.

During Year 1, S has charged depreciation on the machine. This has been based

on the machine's cost to S, not its original cost to the group.

Both the unrealised profit and the excess depreciation must be eliminated from the

consolidated financial statements.

Suppose that in the example above the facts are exactly as before, except that P now

owns onlv 80% of S.