On 1 January 2021, Gemma Ltd sells inventories to its subsidiary, Tess Ltd, for $24 000. The inventories cost Gemma Ltd $20 000 earlier in the current year. Tess Ltd intends to use the item as plant with a useful life of 10 years. The estimated salvage value of the plant is zero and the straight-line method of depreciation will be applied. The tax rate is 30%. The worksheet entry for the year ended 30 June 2021 would include the following adjustment:

A) DR Plant $4 000.
B) CR Plant $4 000.
C) DR Inventories $4 000.
D) CR Inventories $4 000.

Question

Muhammed Mohideen Zulfiqar Ali · Accepted Answer

Final Answer : B, Explanation :  The adjustment needed is to transfer the cost of inventories sold to the plant account as a capital expenditure. This can be done by crediting the Inventories account and debiting the Plant account by the same amount. Since the inventories were sold at a profit of $4,000 ($24,000 - $20,000), this profit is recognized as a capital gain in the books of Gemma Ltd. Therefore, the entry to be made is:DR Plant $24,000CR Inventories $20,000CR Plant Gain $4,000The tax rate of 30% will be applied to the capital gain of $4,000, resulting in a tax liability of $1,200 on the gain. However, since the tax liability is not part of the adjustment, it is not included in the answer.

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