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Topic 6 Consolidation:

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Tom Polkinghorne

on 10 September 2015

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Transcript of Topic 6 Consolidation:

Beginning of the current period.
Jessica Ltd sold a used depreciable asset to Amelie Ltd for $80,000.
Amelie Ltd is a wholly owned subsidiary of Jessica Ltd.
Jessica Ltd originally paid $200,000 for the asset.
Jessica Ltd had charged depreciation of $150,000 at the time of sale.
The Question
In calculating the depreciation expense for the consolidated group, the group accountant, RuiFen Xue is unsure of the following:
Which amount should the depreciation rate be applied to ($200,000, $50,000 or $80,000)?
Which depreciation rate to use (10% or 20%)?

Explain which depreciation rate should be used and to what amount it should be applied.
Material Facts
Material Facts
The Sale
The Asset
Jessica & Amelie
Jessica Ltd purchased the asset for $200,000 and at the date of sale had charged $150,000 depreciation on the asset = carrying amount of $50,000 before the sale.
Amelie Ltd would carry the asset at the amount in which Amelie Ltd purchased it, in this case $80,000.
No third party has been involved in this transaction, therefore profit made on the sale is considered 'unrealised' by group

This Transaction
has not made a gain or loss from transferring the asset from Jessica Ltd to Amelie Ltd.
The transaction did not change the value of the asset to the
Whilst the asset cost Amelie Ltd $80,000, the
recognises the asset at its original cost to the
, which was the cost to Jessica less depreciation: $200,000 - $150,000 =

The group should recognise the asset
at its cost to the group and not Amelie
Ltd (subsidiary). RuiFen Xue
should apply the
depreciation rate to
the $50,000.
What do you think?
Which amount should RuiFen Xue apply to the depreciation rate ($200,000, $50,000 or $80,000)?

Relate to the question:
Within the group, the asset has been transferred from one place of use to another (Jessica Ltd to Amelie Ltd)
Amelie Ltd uses the asset differently to Jessica Ltd.
The asset is now subject to wear and tear, life expectations etc. due to association with Amelie's other assets and use of this asset.
The appropriate rate for consolidation purposes is that of the entity in which the asset is used.
Amelie's depreciation rate of 20% (straight-line) should be used
by RuiFen Xue
To Remember:
Jessica Ltd (parent) sold the asset to Amelie Ltd (subsidiary).
Amelie now owns and uses the asset.
The purpose of making the consolidation adjustments is not to show the financial statements as they would have been if the transaction had not occurred,
BUT to eliminate the effects of the intragroup transactions.
Chapter 20
Case Study 2
Which amount should the depreciation rate be applied to ($200,000, $50,000 or $80,000)?
Which depreciation rate should RuiFen Xue use, 10% or 20%?
Topic 6 Consolidation:
Wholly-owned subsidiaries & intragroup transactions

Presenter: Tom Polkinghorne

AYB340 Company Accounting
Jessica Ltd used a 10% per annum straight-line depreciation method.
Amelie Ltd uses a 20% per annum straight-line depreciation method.

Should RuiFen Xue use Jessica's (10%) rate of depreciation or Amelie's (20%)?

What do you
The Asset
The Group

The idea of consolidated reports is:
to show the financial performance and position of the
, not that of the legal entities.
show only those profits made by transacting with parties external to the
show assets at cost to the
, not at cost to the individual legal entities (i.e. Amelie Ltd)
RuiFen Xue should depreciate the asset using the straight-line method at a rate of 20% per annum.

RuiFen Xue should apply this rate
to the amount of $50,000.
Any further questions or comments to add?

Thank you for participating
A wholly-owned subsidiary is:
Where the parent (Jessica Ltd) owns 100% of the subsidiary (Amelie Ltd).

A consolidated group exists:
where there are at least two entities, a parent (Jessica Ltd) and subsidiary (Amelie Ltd).
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