Part A: adjustment on consolidation for profit/(loss) on sale of asset.

On 1 July, 2017 Pedal Ltd. sold equipment to Rim Ltd. for $20,000. The equipment had originally been acquired by Pedal Ltd. 5 years earlier at a cost of $30,000. Pedal Ltd. depreciates equipment over 10 years using the straight line method. On acquisition Rim Ltd. depreciated the asset for a further 5 years. Tax rate is assumed to be 30 per cent.

Workings:

In the books of Pedal Ltd:

$

Equipment at cost 30,000

Accumulated depreciation :

5 years @ $3,000 pa. 15,000

Carrying amount 15,000

Sold to Rim Ltd. 20,000

Profit on sale 5,000

On consolidation the carrying amount of the equipment must be recorded at the value applicable to the groups assets. This involves an adjustment to both the historical cost and the accumulated depreciation. The sale of the asset has not involved any transactions with parties external to the Pedal Ltd. Rim Ltd. group of companies.

Part B: adjusting for the difference in depreciation charges by the entity in which the asset is used and the economic entity.

Where applicable, an adjustment for depreciation is determined by comparing the depreciation charge on the cost of the legal entity with the depreciation charge on the cost of the economic entity:

Rim Ltd.: Cost of equipment: $20,000

Depreciation expense pa:

20% x $20,000 (5 years) $4,000

Economic entity: Cost of equipment: $30,000

Depreciation expense pa:

10% x $30,000 $3,000

Depreciation adjustment:

$4,000 - $3,000 $1,000