Unrealized profit on property, plant and equipment, Financial Accounting

Unrealized profit on Property, Plant and Equipment

Where one company sells an item of PPE  to the other company in the group then, this will lead to two main problems.

a) The selling company will report on unrealized profit because the item of PPE is still used within the group.  Whereas the PPE of the buying company will be overstated by the unrealized profit.

An entry is thus required to reverse the unrealized profit and the overstatement. Relevant entries

i) If the holding company made the sale
DR.    Group retained profits
    CR.    Group PPE

(With the full unrealized profit)

ii) If the subsidiary company made the sale,
    DR.    Group retained profits (with holding company’s share of unrealized profit)
    DR    Minority interest (With unrealized profit)

        CR.    Group PPE (With the full unrealized profit)

b) The buying company will charge excess depreciation due to the inflated price of PPE (excess depreciation is the difference between charged to date based on the actual cost of PPE)

This means, that the profits of the buying company are understated and PPE is also understated due to the excess depreciation.

An entry is thus required to write back the depreciation and also the reserve the understatement of the PPE.  The following entries are relevant:

If the holding company made the sale and thus the subsidiary company is charging the excess depreciation.

DR    Group PPE (With the full excess depreciation)
    CR.    Group retained profits (with holding company share of excess depreciation)
    CR M2 (With the minority’s share of excess depreciation)


If subsidiary company made the sale and thus holding company is charging the excess depreciation,

DR    Group PPE
    CR    Group retained profits

(With the full excess depreciation)

Posted Date: 12/12/2012 2:52:31 AM | Location : United States







Related Discussions:- Unrealized profit on property, plant and equipment, Assignment Help, Ask Question on Unrealized profit on property, plant and equipment, Get Answer, Expert's Help, Unrealized profit on property, plant and equipment Discussions

Write discussion on Unrealized profit on property, plant and equipment
Your posts are moderated
Related Questions
Concept  of Financial statements  Financial statements portray the financial effect of transactions and events by grouping them into classes broadly called elements. A complete

An introduction to the company, which focuses on the context in which the company operates: • Ownership, development and location; • Resources, processes and employment; •


Your firm has been hired to examine the financial statements of Bonanza Development Corp. for possible irregularities.  As part of this task, you reviewed certain land transactions

Group retained profits Retained profits ideally should be the amounts that can be distributed as dividends. Therefore,  in arriving at group retained profits, careful attention s

In common terms the present value of a regular annuity may be shown as given below: PVNn = A/(1 + k) + A/(1 + k) 2 + ..................+ A/(1 + k) N = A (1/(1 + k) + 1/(

How should I handle Booking an invoice in one month for Raw material that has not been received until the following month?

You would like to start investing in the bond markets and your investment horizon is two years.  In view of the current extremely low interest rate environment, you expect the U.S.

The December 31, 2005, balance sheet of Far Imports includes the following items: The bonds were issued on December 31, 2004, at 97, with Interest payable on June 30 and December 3

Surviving Spouse - This is a person whose wife or husband died during tax year. A surviving spouse can file a JOINT RETURN for the year in which death occurred. Additionally a join