Exam 4: Consolidations: Intragroup Transactions

Adjustments for current period inventory transfers during intragroup consolidations do not affect current period profit accounts such as sales and cost of sales.

A basic approach in determining the adjustments needed for the consolidation of intragroup transactions is:

Why are adjustments made for intragroup borrowings on consolidation?

On March 31, 2013 a parent received $20,000 in inventory for cash from its subsidiary. The subsidiary made a profit of $5,000 on the sale. At year end, the parent had sold $15,000 of this inventory to third parties for $28,000. The closing balance of this inventory is $5,000. What is the combined adjustment to sales and cost of sales before tax?

A subsidiary sold goods to its parent company. At its year-end, the parent company still had some of the goods in inventory. Included in the value of these inventories is $30,000 of unrealized profits. What consolidation adjustments should be made to eliminate these unrealized profits? a) Decrease Sales 30,000 Decrease Inventory 30,000 b) Increase Selling expenses 30,000 Decrease Inventory 30,000 c) Increase Cost of Sales 30,000 Decrease Inventory 30,000 d) Increase Inventory 30,000 Increase Sales 30,000

Adjustments for the gain/loss on sale of property, plant and equipment are made in all periods in which the assets are within the group.

In 2011, a parent company sold a tract of land to its subsidiary for $200,000, resulting in a $60,000 loss. The subsidiary's plans for the land did not materialize and it still owned the land at the end of 2014. At the end of 2014, what consolidation adjustments should be made with respect to the loss associated with the sale of land? a) Decrease Retained earnings 60,000 Decrease Land 60,000 b) Decrease Loss on the sale of land 60,000 Decrease Land 60,000 c) Increase Land 60,000 Increase Loss on the sale of land 60,000 d) Increase Land 60,000 Increase Retained earnings 60,000

DEF Company acquired in 2012 a 100% interest in MNO Company by acquiring shares that cost $50,000. In 2012, MNO Company reported income of $10,000 and $8,000 in 2013. MNO Company also paid dividends to DEF Company of $2,000 in 2012 and $ 8,000 in 2013. The balance of DEF Company's investment in MNO Company in its own books if it reflects the investment at cost at December 31, 2012 was:

Rent for office space paid by a parent to a fully-owned subsidiary within the group does not affect the group's profit in the consolidation adjustment process.

If a dividend is declared by a subsidiary in the current period after its acquisition by the parent but is not paid, from the outlook of the group:

Interest payments on bonds within a group of companies do not require adjustments to revenues and expenses in the respective entities.

On December 31, 2009, Cawthra Ltd. purchased 100% of the outstanding common shares of Lawlor Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Lawlor totaled $8 million and consisted of $1 million in common shares and $7 million in retained earnings. Both companies use the straight-line method to calculate depreciation. Goodwill, if any arises as a result of this business combination, is written down when there is an impairment. Both Cawthra and Lawlor report under accounting standards for private enterprises and pay tax at the rate of 40%. For the year ending December 31, 2014, the statements of earnings for Cawthra and Lawlor were as follows: Cawthra Lawlor Sales and other revenue \ 22,500,000 \ 9,800,000 Cost of goods sold 16,000,000 5,000,000 Depreciation expense 2,500,000 2,000,000 Other expenses Net income \ 2,200,000 \ 1,600,000 As at December 31, 2014, the condensed statements of financial position for the two companies were as follows: Cawthra Lawlor Total assets \ 31,000,000 \ 13,500,000 Liabilities \ 5,000,000 \ 1,200,000 No par common shares 12,100,000 1,000,000 Retained earnings 13,900,000 11,300,000 Total \ 31,000,000 \ 13,500,000 Other Information: -On December 31, 2009, Lawlor had a building with a fair value that was $300,000 greater than its carrying value. The building had an estimated remaining useful life of 20 years. -On December 31, 2009, Lawlor had inventory with a fair value that was $200,000 less than its carrying value. This inventory was sold in 2011. -During 2014, Cawthra sold merchandise to Lawlor for $100,000, a price that includes a gross profit of $40,000. During 2014, 40% of this merchandise was resold by Lawlor to third parties and the other 60% remains in its December 31, 2014 inventories. On December 31, 2013, the inventories of Lawlor contained merchandise purchased from Cawthra on which Cawthra had recognized a gross profit in the amount of $20,000. -During 2014, Cawthra declared and paid dividends of $300,000 while Lawlor declared and paid dividends of $100,000. -Cawthra accounts for its investment in Lawlor using the cost method. -The retained earnings of Cawthra as at December 31, 2013 was $12,000,000. On that date, Lawlor had retained earnings of $9,800,000. Lawlor has not issued any common shares since its acquisition by Cawthra. -There were no specific events or circumstances between 2010 and 2014 to indicate any impairment of goodwill. Required: Calculate consolidated net income for the year ending December 31, 2014.

Consolidated financial statements are prepared for:

It is possible for an entity to acquire the bonds of another entity in the group on the open market.

Intragroup borrowings result in:

Interest payments result in revenues in one member of the group and expenses in another.

On September 30, 2013 a parent company sold a piece of machinery to its wholly-owned subsidiary for $10,000 which was $5,000 above its carrying amount at that date. The machinery has a remaining useful life of 5 years. What is the pre-tax adjustment required to prepare the December 31, 2013 consolidated financial statements?

Dividends received by a parent from a subsidiary are accounted for:

Generally dividends paid and received between entities within a group do not require tax-effect adjustments upon consolidation.

Why are intragroup transactions eliminated?