Reference no: EM132976926
Little Angel Limited owns 100 percent of Wonderland Limited. On 1 July 2019, Wonderland Limited sold an item of equipment to Little Angel Limited for $150,000. This equipment originally cost Wonderland Limited $200,000 and has accumulated depreciation of $100,000 at the date of sale. The remaining useful life of the equipment is assessed as five years. The tax rate is 30 percent.
Little Angle Limited must prepare the consolidated financial statements.
The consolidation journal entries to eliminate the sale of this equipment for the financial year ending 30 June 2021.
Equipment 200,000
Accumulated depreciation 100,000
Carrying amount 100,000
Sale price 150,000
Gain on sale of plant 50,000
Tax rate 30%
Tax effect associated with the gain on sale of equipment 15,000
Useful life 5
P Limited's depreciation rate 30,000
The economic entity's depreciation rate 20,000
Depreciation expense adjustment per year 10,000
Tax effect associated with depreciation expense adjustment 3,000
Financial year ending 31 March 2022
Dr Retained earnings - opening 50,000
Dr Plant 50,000
Cr Accumulated depreciation 100,000
Dr Deferred tax assets 15,000
Cr Retained earnings - opening 15,000
Dr Accumulated depreciation 20,000
Cr Retained earnings - opening 10,000
Cr Depreciation expense 10,000
Dr Retained earnings - opening 3,000
Dr Income tax expense 3,000
Cr Deferred tax assets 6,000
If Little Angel Limited failed to eliminate the sale of this equipment when preparing the consolidated financial statements for the financial year ending 30 June 2021, the impact on the consolidated financial statements for the year would be:
Retained earnings - opening balance is overstated by 28,000
The original cost of the plant is understated by 50,000
The accumulated depreciation is understated by 80,000
The depreciation expense is overstated by 10,000
The income tax expense is understated by 3,000
The deferred tax assets are understated by 9,000
Required:
Problem 1: Based on the impact on the consolidated financial statements for the year is provided above. Please explain how do we evaluate these accouts/ impacts overstated or understated? When is overstated or understated?