Apple Plc Owns All the Issued Capital of Pear Plc

question 35

Multiple Choice

Apple Plc owns all the issued capital of Pear Plc.On 1 July 2014,Pear Plc purchased an item of plant from Apple Plc for £1 000 000.Apple Plc had owned the plant for 5 years.It originally cost £1 350 000 and the accumulated depreciation at 1 July 2004 is £562 500.The remaining useful life of the equipment on the date of sale to Pear Ltd is estimated to be 7 years.The pattern of benefits is expected to be obtained from the equipment evenly over its useful life.The tax rate is 30%.Round all calculations to the nearest dollar. What are the consolidation journal entries required for this inter-company transaction for the periods ended 30 June 2015 and 30 June 2016?

• A) \(\begin{array}{|l|l|r|l|} \hline {\text { Period ended } 30 \text { June 2015: }} & & \\ \hline & & \\ \hline \mathrm{Dr} & \text { Gain on sale } & 212500 & \\ \hline \mathrm{Cr} & \text { Plant } & & 212500 \\ \hline & & \\ \hline \mathrm{Dr} & \text { Deferred tax asset } & 63750& \\ \hline \mathrm{Cr} & \text { Income tax expense } & & 63750 \\ \hline\\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 30357 & \\ \hline \mathrm{Cr} & \text { Depreciation expense } & & 30357 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Income tax expense } & 9107 & \\ \hline \mathrm{Cr} & \text { Deferred tax asset } & & 9107 \\ \hline\\ \hline \text { Period ended 30 June } 2016& & & \\ \hline\\ \hline \mathrm{Dr} & \text { Opening retained earnings } & 148750 & \\ \hline \mathrm{Dr} & \text { Plant } & 350000 & \\ \hline \mathrm{Cr} & \text { Accumulated depreciation - plant } & & 498750 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 70339 & \\ \hline \mathrm{Cr} & \text { Opening retained earnings } & & 39982 \\ \hline \mathrm{Cr} & \text { Depreciation expense } & &30357 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Opening retained earnings } & & 9107 \\ \hline \mathrm{Dr} & \text { Income tax expense } & & 9107 \\ \hline \end{array}\)
• B) \(\text { Period ended } 30 \text { June } 2015 \text { : }\) \(\begin{array}{|l|l|r|r|} \hline \mathrm{Dr} & \text { Gain on sale } & 212500 & \\ \hline \mathrm{Dr} & \text { Plant } & 350000 & \\ \hline \mathrm{Cr} & \text { Accumulated depreciation - plant } & & 562500 \\ \hline\\ \hline \mathrm{Dr} & \text { Deferred tax asset } & 63750 & \\ \hline \mathrm{Cr} & \text { Income tax expense } & & 63750 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 30357 & \\ \hline \mathrm{Cr} & \text { Depreciation expense } & & 3035 \\ \hline\\ \hline \text { Dr } & \text { Income tax expense } & 9107 & \\ \hline \mathrm{Cr} & \text { Deferred tax asset } & & 910\\ \hline \end{array}\) \(\text { Period ended } 30 \text { June } 2016 \text { : }\) \(\begin{array}{|l|l|r|r|} \hline \mathrm{Dr} & \text { Opening retained earnings } & 148750 & \\ \hline \mathrm{Dr} & \text { Deferred tax asset } & 63750 & \\ \hline \mathrm{Dr} & \text { Plant } & 350000 & \\ \hline \mathrm{Cr} & \text { Accumulated depreciation - plant } & & 562500 \\ \hline\\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 60714 & \\ \hline \mathrm{Cr} & \text { Opening retained earnings } & & 30357 \\ \hline \mathrm{Cr} & \text { Depreciation expense } & & 30357 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Opening retained earnings } & 9107 & \\ \hline \mathrm{Dr} & \text { Income tax expense } & 9107 & \\ \hline \mathrm{Cr} & \text { Deferred tax asset } && 18214 \\ \hline \end{array}\)
• C) \(\begin{array}{|c|l|r|r} \hline \text { Period ended 30 June 2015: } & & \\ \hline \mathrm{Dr} & \text { Gain on sale } & 212500 & \\ \hline \mathrm{Cr} & \text { Plant } & & 212500 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 80357 & \\ \hline \mathrm{Cr} & \text { Depreciation expense } & & 80357 \\ \hline\\ \hline \mathrm{Dr} & \text { Income tax expense } & 24107 & \\ \hline \mathrm{Cr} & \text { Deferred tax asset } & & 24107 \\ \hline \end{array}\) \(\text { Period ended } 30 \text { June } 2016 \text { : }\) \(\begin{array}{|l|l|r|r|} \hline \mathrm{Dr} & \text { Opening retained earnings } & 148750 & \\ \hline \mathrm{Cr} & \text { Plant } & & 148750 \\ \hline \mathrm{Dr} & \text { Accumulated depreciation - plant } &80357 & \\ \hline \mathrm{Cr} & \text { Depreciation expense } & & 80357 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Income tax expense } & 24107 & \\ \hline \mathrm{Cr} & \text { Deferred tax asset } & & 24107 \\ \hline \end{array}\)

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Definitions:

Stock Investments

Financial assets consisting of stakes in companies through the purchase of common or preferred stock shares, with the expectation of earning dividends or capital gains.

Net Income

The amount of money that remains after all operating expenses, taxes, and dividends have been paid, representing the company's profit.

Cost Method

An accounting method used to value inventory or assets, based on the price paid to acquire them.

Stock Investments

Financial assets representing shares of ownership in a corporation, which may provide dividends and capital gains to the investor.