Exam 28: Further Consolidation Issues I: Accounting for Intragroup Transactions
Aladdin Ltd sells inventory for a profit to its subsidiary Jasmine Ltd to be used as machinery in Jasmine Ltd's production process.The consolidation worksheet of Aladdin Ltd with respect to this transaction only should not include:
C
Penny Ltd sells inventory items to its subsidiary Bolt Ltd.If during the financial year 2013,the unrealised profits in ending inventory in Bolt Ltd is less than its unrealised profits in beginning inventory,which of the following statements is correct with respect to Penny Ltd's consolidated financial statements after considering these transactions only?
A
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.
From Worked Example 28.3,on pages 930-935,there were unrealised profits in the closing inventory of Big Ltd at 30 June 2015,so that when it is time to do the consolidation adjustments at the end of the next financial year for Big Ltd and its controlled entity there will be unrealised profits in opening inventory.Remember that the consolidation journal entries do not affect the accounts of the individual legal entities and hence do not carry forward,and therefore the cost of the opening inventory held by one of the entities within the group will be overstated from the group's perspective,as at the beginning of the financial period.
The closing retained earnings of Little Ltd in the last year (opening retained earnings this year)will also be overstated from the group's perspective as it will include a gain on the intragroup sale of inventory.In the consolidation adjustments,we need to shift the income from the previous period,in which the inventory was still on hand,to the period in which the inventory will ultimately be sold to parties external to the economic entity.The inventory is assumed to be sold in the following period.Hence the consolidation adjustment entries at the end of the following year at 30 June 2016,would be:
Dr Opening retained earnings-1 July 2015 $40 000
Cr Cost of goods sold $40 000
Remember that reducing the value of opening inventory will reduce cost of goods sold.This entry will effectively shift the income from 2015 to 2016 (the period in which the sale to an external party actually occurs).With higher profits this will lead to a higher tax expense,which,as we know,is based upon accounting profits with the adoption of tax-effect accounting.
Dr Income tax expense $13 200
Cr Opening retained earnings-1 July 2015 $13 200
Any profits in closing inventory in 2016 will also need to be accounted for.
For more information refer to 'Unrealised profit in opening inventory' .
Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits by a subsidiary company.Where dividends are paid out of post-acquisition profits the investment in the subsidiary should be decreased by the amount of the dividend.
The fact that consolidation worksheets start 'afresh' each year means that the tax entry for eliminating unrealised profit in opening inventory requires a 'Dr' to deferred tax assets,rather than income tax expense.
Explain why gains recognised on sale of assets between entities within a group are reversed on consolidation.
Zeus Ltd owns 100% of the issued capital of Ares Ltd.On 1 July 2012,Zeus Ltd purchased an item of equipment from Ares Ltd 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 Ltd 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?
Stormy Ltd has purchased all the issued capital of Cloud Ltd at the beginning of the current period.At the end of the period Cloud Ltd declares a dividend of $50 000 that is identified as being paid out of pre-acquisition profits.What entries would Stormy Ltd and Cloud Ltd make in their own books? (Assume Stormy Ltd accrues the dividends of subsidiaries when they are declared.)
French Ltd owns 100% of the issued capital of Pastry Ltd.During the period ended 30 June 2014,Pastry Ltd sold inventory that cost $190 000 for $300 000 to French Ltd.Sixty per cent of this inventory remains on hand in French Ltd at the end of that year.Both companies use a perpetual inventory system.The taxation rate is 30%. What consolidation journal entries are required in relation to the inter-company transaction for the period ending 30 June 2015?
The term 'cum div' is used when shares are being bought with a dividend entitlement.
Little Company declared a dividend of $90 000 for the period ended 30 June 2014.Big Company owns 100% of the equity of Little Company.Big Company 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 2014?
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.
Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the parent entity's financial statements.
Companies in an economic entity may increase the level of consolidated sales reported by selling inventory between themselves.
Apple Ltd owns all the issued capital of Pear Ltd.On 1 July 2014,Pear Ltd purchased an item of plant from Apple Ltd for $1 000 000.Apple Ltd 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?
Discuss the reasoning behind the elimination all dividends receivable/payable between entities within the group during the consolidation process.
What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Limited is the parent of Wise Limited? (Ignore the tax effect.)
Morecombe purchases 500 units of inventory for $20 each.Morecombe sells this entire inventory to Wise at a mark up of 25%.Wise then sells half of the inventory to an external party.Half of the remaining amount (after the external sale)is sold back to Morecombe for $2500.
Zeus Ltd owns 100% of the issued capital of Ares Ltd.On 1 July 2015,Zeus Ltd purchased an item of equipment from Ares Ltd 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 Ltd 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?
Belgium Ltd owns all the issued capital of Chocolate Ltd.During the period ended 30 June 2015,Belgium Ltd sold Chocolate Ltd inventory that had a cost of $200 000 for $270 000.At the end of the current period Chocolate Ltd 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 Ltd at a profit of $49 000.At the end of that period (30 June 2014)Belgium Ltd 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?
Blue Ltd sold inventory items (with a cost of $90 000)to its subsidiary Maroon Ltd for $120 000.Half of the inventory items were sold by Maroon Ltd 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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