Calculate the amount of unrealized profit and show the consolidation adjustment required as at 31 December 2013

Step 1: Calculate the amount of unrealized profit on the sale of the tractor. The unrealized profit is the difference between the selling price and the cost of the tractor. Selling Price = GH¢500,000 Cost = GH¢400,000 Unrealized Profit = GH¢500,000 - GH¢400,000 = GH¢100,000 The amount of unrealized profit is GH¢100,000. Step 2: Calculate the excess depreciation charged by PP Plantations. PP Plantations depreciates tractors at 20% per annum on cost. The sale occurred on 1 January 2013, so a full year's depreciation is considered. Depreciation charged by PP Plantations = 20\% × GH¢500,000 = GH¢100,000 From the group's perspective, the tractor's cost is GH¢400,000. Depreciation based on original cost = 20\% × GH¢400,000 = GH¢80,000 Excess Depreciation = GH¢100,000 - GH¢80,000 = GH¢20,000 Step 3: Show the consolidation adjustment required as at 31 December 2013. The consolidation adjustment eliminates the unrealized profit from the group's financial statements and adjusts the asset and depreciation to reflect the original cost to the group. The journal entry required is: To eliminate the net unrealized profit from the group's profit for the year (initial unrealized profit less realized portion through depreciation). To reverse the excess depreciation charged by the buyer. To reduce the carrying amount of the asset to its original cost for the group. |l|l|r|r| Date & Particulars & Debit (GH¢) & Credit (GH¢) \\ 31 Dec 2013 & Retained Earnings (or Profit for the year) & 80,000 & \\ & Accumulated Depreciation & 20,000 & \\ & To Property, Plant \& Equipment (Tractor) & & 100,000 \\ & (To eliminate unrealized profit on inter-company sale & & \\ & and adjust asset and depreciation) & & \\ The amount of unrealized profit is GH¢100,000. Send me the next one 📸