A non-current asset was sold by Subsidiary Plc to Parent Plc during the 2013/14 financial year.The carrying amount of the asset at the time of the sale was £1 400 000.As part of the consolidation process,the following journal entry was passed. \[\begin{array} { | l | r | l | } \hline 30 \text { June } 2014 & & \\ \hline \text { Dr Profit on sale of asset } & 400000 & \\ \hline \text { Dr Asset } & 600000 & \\ \hline \text { Cr Accumulated depreciation } & & 1000000 \\ \hline \end{array}\] What (a)amount did Parent Plc pay Subsidiary Plc for the asset; (b)was the cost of the asset as shown in the books of Subsidiary Plc?

A) (a) £1 800 000; (b) £1 400 000 B) (a) £1 800 000; (b) £1 600 000 C) (a) £1 400 000; (b) £2 400 000 D) (a) £1 800 000; (b) £2 400 000 A) (a) £1 800 000; (b) £1 400 000 B) (a) £1 800 000; (b) £1 600 000 C) (a) £1 400 000; (b) £2 400 000 D) (a) £1 800 000; (b) £2 400 000

Forest Ltd purchased all the issued capital of Shrub Ltd on 1 July 2013 for cash consideration of $1 million.The fair value of Shrub Ltd's net assets at that date was $1 million made up of: \[\begin{array} { | l | r | } \hline \text { Share capital } & \$ 750000 \\ \hline \text { Retained earnings } & 250000 \\ \hline \text { Total equity } & \$ 1000000 \\ \hline \end{array}\] During the period ended 30 June 2014,Shrub Ltd declare a dividend of $100 000 out of pre-acquisition earnings.What consolidation journal entries would be required to prepare group accounts for the period?

A) $\begin{array}{|l|l|r|r|} \hline \mathrm{Dr} & \text { Dividend receivable } & 100000 & \\ \hline \mathrm{Cr} & \text { Dividend declared } & & 100000 \\ \hline & & & \\\hline \mathrm{Dr} & \text { Share capital } & 750000 & \\ \hline \mathrm{Dr} & \text { Retained earnings } & 250000 & \\ \hline \mathrm{Cr} & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline \end{array}$ B) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\ \hline \end{array}\] C) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 100000 \\ \hline \end{array}\] D) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Dividend income } & 100000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend payable } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline \end{array}\] A) $\begin{array}{|l|l|r|r|} \hline \mathrm{Dr} & \text { Dividend receivable } & 100000 & \\ \hline \mathrm{Cr} & \text { Dividend declared } & & 100000 \\ \hline & & & \\\hline \mathrm{Dr} & \text { Share capital } & 750000 & \\ \hline \mathrm{Dr} & \text { Retained earnings } & 250000 & \\ \hline \mathrm{Cr} & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline \end{array}$ B) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\ \hline \end{array}\] C) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 100000 \\ \hline \end{array}\] D) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Dividend income } & 100000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\ \hline \mathrm { Cr } & \text { Dividend payable } & & 100000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Share capital } & 750000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\ \hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\ \hline \end{array}\]

Exam 21: Further Consolidation Issues I: Accounting for Intragroup Transactions

Explain,with examples,the difference between dividend payments out of pre-acquisition profits and dividend payments out of post-acquisition profits,and the manner in which they are accounted for in consolidation accounting.

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Question 1

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Post-acquisition-only dividends paid externally should be shown in the consolidated financial statements.In Figure 21.1 for example,we see that the subsidiary,which we will say is 100% owned by Parent Entity,pays €1000 in dividends to Parent Entity and Parent Entity pays €4000 in dividends to its shareholders.The only dividends being paid externally (that is,which leave the 'boundary' of the economic entity),and hence the only dividends to be shown in the consolidated financial statements,will be the dividends paid to the shareholders of Parent Entity; that is,the €4000 in dividends.The dividends paid to the parent entity by the 100-per-cent-owned subsidiary will be eliminated on consolidation.
Pre-acquisition-from 2008 Paragraph 12 of IAS 27 Separate Financial Statements now requires that:
An entity shall recognise a dividend from a subsidiary,a joint venture or an associate in profit or loss in its separate financial statements when its right to receive the dividend is established.
Therefore,the situation now is that dividends paid by a subsidiary are recorded as dividend revenue in the parent entity's accounts,regardless of whether they are paid out of:
a.pre-acquisition profits/equity (that is,paid out of profits earned by the subsidiary prior to the purchase by the parent of the interest in the subsidiary)or
b.post-acquisition profits/equity (that is,paid out of profits earned by the subsidiary after the purchase by the parent entity of the interest in the subsidiary).
Once a subsidiary makes a dividend payment out of pre-acquisition earnings,this raises another issue to consider.If a payment is made out of pre-acquisition profits of the subsidiary then this in itself may have implications for the value of the parent's investment in the subsidiary.The dividend payment will have the effect of reducing the net assets of the subsidiary.This in turn may provide an indication that the parent entity's investment in the subsidiary may thereafter have a value that may be below the original cost of the investment; that is,the investment in the subsidiary may be impaired.
For more information refer to ' Dividends out of post-acquisition profits' and ' Dividends out of pre-acquisition profits'.

Lilo Plc sells inventory items to its subsidiary Stitch Plc.If during the financial year 2013,the unrealised profits in ending inventory in Stitch Plc exceeds that of its unrealised profits in beginning inventory,which of the following statements is correct with respect to Lilo Plc's consolidated financial statements after considering these transactions only?

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Question 2

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Explain,with examples and the assumptions made,why it is necessary to pass consolidation journal entries to adjust for unrealised profits existing in opening inventory.

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Question 3

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Entities that are related often sell inventory to one another in what is known as an intragroup sale of inventory.From the group's perspective,revenues should not be recognised until an external sale of inventory has taken place,that is,when inventory has been sold to parties outside the group.As we already know,paragraph B86c of IFRS 10 stipulates:
Consolidated financial statements eliminate in full intragroup assets and liabilities,equity,income,expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets,such as inventory and fixed assets,are eliminated in full).Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements.IAS 12 Income Taxes applies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions.
For example,Company A might sell €100 000 of inventory to Company B,which,in turn,sells it to a party outside the economic entity for an amount of €150 000 (see Figure 21.2).If we simply aggregate the sales of Company A and Company B in the consolidation process,it would appear that the economic entity's total sales revenue are €250 000.From the economic entity's perspective,this would be incorrect.The only sales revenue that should appear in the consolidated statements are those made to parties external to the group,in this case one sale of €150 000.It is possible at year end for some,or all,of the inventory sold within the group to still be on hand.Let us assume that half of the inventory sold by Company A to Company B is still on hand at year end and,further,that the total amount of inventory transferred from Company A to Company B at a sales price of €100 000 actually cost Company A €70 000 to manufacture.With half of the inventory still on hand,this would mean that effectively there is inventory on hand in Company B's financial statements,at a cost to Company B of €50 000,that cost the group only €35 000 to manufacture.As we know,pursuant to international financial reporting standards,an entity is to record inventory at the lower of cost and net realisable value (see

Discuss the reasoning behind the elimination all dividends receivable/payable between entities within the group during the consolidation process.

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Question 4

Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the parent entity's financial statements.

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Question 5

Belgium Plc owns all the issued capital of Chocolate Plc.During the period ended 30 June 2015,Belgium Ltd sold Chocolate Plc inventory that had a cost of €200 000 for €270 000.At the end of the current period Chocolate Plc had 75% of that inventory still on hand; the rest was sold to entities external to the group.During the previous period Chocolate Ltd had sold inventory to Belgium Plc at a profit of €49 000.At the end of that period (30 June 2014)Belgium Plc still had 40% of that inventory on hand.That entire inventory was sold to parties external to the group during the current year.The taxation rate is 30% and both companies use a perpetual inventory system. What consolidation journal entries are required to eliminate the effects of these transactions for the period ended 30 June 2015?

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Question 6

Aladdin Plc sells inventory for a profit to its subsidiary Jasmine Plc to be used as machinery in Jasmine Plc's production process.The consolidation worksheet of Aladdin Plc with respect to this transaction only should ? not include:

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Question 7

Alice Plc sold inventory items to its subsidiary Mad Hatter Plc and had the following intercompany transactions: Cost of inventory €100 000 sold for €125 000 for the year ended 30 June 2012.Half of the inventory items were sold by Mad Hatter Plc to external parties before the financial year end 30 June 2012. Cost of inventory €75 000 sold for €100 000 for the year ended 30 June 2013.Half of the inventory items were sold by Mad Hatter Plc to external parties before the financial year end 30 June 2013. Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013?

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Question 8

A non-current asset was sold by Subsidiary Plc to Parent Plc during the 2013/14 financial year.The carrying amount of the asset at the time of the sale was £1 400 000.As part of the consolidation process,the following journal entry was passed. 30 June 2014 Dr Profit on sale of asset 400000 Dr Asset 600000 Cr Accumulated depreciation 1000000 What (a)amount did Parent Plc pay Subsidiary Plc for the asset; (b)was the cost of the asset as shown in the books of Subsidiary Plc?

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Question 9

If a subsidiary makes a dividend payment out of pre-acquisition earnings,the parent entity should consider whether its investment in the subsidiary is impaired.

(True/False)

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Question 10

Intragroup transactions that are to be eliminated in the consolidated accounts include:

(Multiple Choice)

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Question 11

Transactions between entities that form an economic group should be eliminated in proportion to the level of control between the parent entity and the subsidiary entity.

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Question 12

Monster Co Plc owns 100% of the issued shares of Mini Co Plc.Mini Co Ltd declared a dividend of €100 000 for the period ended 30 June 2014.Monster Co Plc accrues dividends when they are declared by its subsidiaries.What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2015?

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Question 13

Aladdin Plc sold inventory items (with a cost of £100 000)to its subsidiary Genie Plc for £120 000.Half of the inventory items were sold by Genie Plc to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

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Question 14

The level of equity ownership is not a factor in deciding what proportion of a transaction between entities in a group should be eliminated.

(True/False)

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Question 15

Forest Ltd purchased all the issued capital of Shrub Ltd on 1 July 2013 for cash consideration of $1 million.The fair value of Shrub Ltd's net assets at that date was $1 million made up of: Share capital \ 750000 Retained earnings 250000 Total equity \ 1000000 During the period ended 30 June 2014,Shrub Ltd declare a dividend of $100 000 out of pre-acquisition earnings.What consolidation journal entries would be required to prepare group accounts for the period?

(Multiple Choice)

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Question 16

The value of inventory on hand for the economic group at the end of the period will always equal the sum of the inventory on hand at the end of the period for each of the entities in the group.

(True/False)

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Question 17

Zeus Plc owns 100% of the issued capital of Ares Plc.On 1 July 2015,Zeus Plc purchased an item of equipment from Ares Plc for €800 000.Ares had owned the equipment for 2 years.It originally cost €890 000 and the accumulated depreciation was €178 000 at the time of sale.The equipment has been depreciated over this time,but not written down or revalued.The remaining useful life of the equipment at 1 July 2015 is estimated to be 8 years.Zeus Plc expects the benefits to be obtained from the equipment to be evenly received over its useful life.The tax rate is 30%. What are the consolidation journal entries required for this inter-company transaction for the period ended 30 June 2016?

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Question 18

Zeus Plc owns 100% of the issued capital of Ares Plc.On 1 July 2012,Zeus Plc purchased an item of equipment from Ares Plc for €800 000.Ares had owned the equipment for 2 years.It originally cost €890 000 and the accumulated depreciation was €178 000 at the time of sale.The equipment has been depreciated over this time,but not written down or revalued.The remaining useful life of the equipment at 1 July 2012 is estimated to be 8 years.Zeus Plc expects the benefits to be obtained from the equipment to be evenly received over its useful life.The tax rate is 30%. What are the consolidation journal entries required for this inter-company transaction for the period ended 30 June 2014?

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Question 19

Tookey Plc sold inventory items (with a cost of £75 000)to its subsidiary Milky Plc for £135 000.A third of the inventory items were sold by Milky Plc to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

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Question 20

Showing 1 - 20 of 46

Explain,with examples,the difference between dividend payments out of pre-acquisition profits and dividend payments out of post-acquisition profits,and the manner in which they are accounted for in consolidation accounting.

Explain,with examples and the assumptions made,why it is necessary to pass consolidation journal entries to adjust for unrealised profits existing in opening inventory.

Discuss the reasoning behind the elimination all dividends receivable/payable between entities within the group during the consolidation process.

Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the parent entity's financial statements.

Aladdin Plc sells inventory for a profit to its subsidiary Jasmine Plc to be used as machinery in Jasmine Plc's production process.The consolidation worksheet of Aladdin Plc with respect to this transaction only should ? not include:

If a subsidiary makes a dividend payment out of pre-acquisition earnings,the parent entity should consider whether its investment in the subsidiary is impaired.

Intragroup transactions that are to be eliminated in the consolidated accounts include:

Transactions between entities that form an economic group should be eliminated in proportion to the level of control between the parent entity and the subsidiary entity.

Aladdin Plc sold inventory items (with a cost of £100 000)to its subsidiary Genie Plc for £120 000.Half of the inventory items were sold by Genie Plc to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

The level of equity ownership is not a factor in deciding what proportion of a transaction between entities in a group should be eliminated.

The value of inventory on hand for the economic group at the end of the period will always equal the sum of the inventory on hand at the end of the period for each of the entities in the group.

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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