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

The unrealized profit is the difference between the selling price and the cost of the tractor.

$$\text{Selling Price} = \text{GH¢}500,000$$ $$\text{Cost} = \text{GH¢}400,000$$ $$\text{Unrealized Profit} = \text{GH¢}500,000 - \text{GH¢}400,000 = \text{GH¢}100,000$$

The amount of unrealized profit is GH¢100,000.

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.

$$\text{Depreciation charged by PP Plantations} = 20\% \times \text{GH¢}500,000 = \text{GH¢}100,000$$

From the group's perspective, the tractor's cost is GH¢400,000.

$$\text{Depreciation based on original cost} = 20\% \times \text{GH¢}400,000 = \text{GH¢}80,000$$ $$\text{Excess Depreciation} = \text{GH¢}100,000 - \text{GH¢}80,000 = \text{GH¢}20,000$$

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.

$$\begin{array}{|l|l|r|r|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Debit (GH¢)} & \textbf{Credit (GH¢)} \\ \hline \text{31 Dec 2013} & \text{Retained Earnings (or Profit for the year)} & 80,000 & \\ & \text{Accumulated Depreciation} & 20,000 & \\ & \quad \text{To Property, Plant \& Equipment (Tractor)} & & 100,000 \\ & \textit{(To eliminate unrealized profit on inter-company sale} & & \\ & \textit{and adjust asset and depreciation)} & & \\ \hline \end{array}$$

The amount of unrealized profit is $\text{GH¢100,000}$.