Exam 4: Consolidations: Intragroup Transactions

Why are adjustments required for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods?

On January 1, 2011, Rocker Ltd. formed Smith Co., a 100% owned subsidiary. During 2014, Rocker sold Smith $100,000 in goods. The unrealized profit in Smith's inventories was $20,000 at December 31, 2013 and $25,000 at December 31, 2014. Ignoring income taxes, what adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 to reflect the unrealized profit in Smith's ending inventory?

Bilson Ltd. is the wholly-owned subsidiary of Lawson Ltd. Bilson purchased all of Lawson's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. How should the gain be shown?

On June 30, 2013 Tulip Ltd. issued one hundred $1,000 bonds with an interest rate of 7% p.a. payable semi-annually on December 31 and June 30 of each year. Crockus Inc., a wholly-owned subsidiary of Tulip Ltd., acquired 75% of the bonds issued. What are some of the December 31, 2013 adjustments required in preparation for the consolidated financial statements?

In the consolidation of intragroup transactions in the current period consideration should be given to the effects of transactions in previous periods.

A subsidiary sold a depreciable asset to the parent at a profit of $100 and the parent depreciates the assets on a straight-line basis over ten years. In year one after the sale, the realized profit is:

If a subsidiary declares a dividend and the dividend is unpaid at the end of the period, the adjustment on the consolidated financial statements will include an increase to dividend revenue.

Why are adjustments made for intragroup transactions involving profits and losses in beginning and ending inventory?

The parent company of subsidiaries that are owned less than 100% but more than 50% have the option of adjusting intragroup transactions and would make a statement to this effect only in the notes to the financial statements.

When the transferred assets are depreciable, subsequent adjustments are made to depreciation accounts.

If a dividend is declared and paid by a subsidiary in the current period after its acquisition by the parent, from the outlook of the group:

Dividends from subsidiary equity are recognized as revenue by the subsidiary.

Adjustments for intragroup dividends affect both the dividends declared by the subsidiary and those declared by the parent.

On February 1, 2013 Smith Company sold inventory to its wholly owned subsidiary Orchid Ltd. for $10,000. These goods had previously cost $7,500. 75% of these goods were then sold by Orchid Ltd. for $15,000 by the February 28, 2013 year-end. What adjustments are required for the preparation of the consolidated financial statements? Ignore the effects of income taxes.

On January 1, 2012, Oliver Ltd. formed Solo Co., a 100% owned subsidiary. During 2014, Oliver sold Solo $200,000 in goods. The unrealized profit in Solo's inventories was $40,000 at December 31, 2013 and $50,000 at December 31, 2014. Ignoring income taxes, what adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 to reflect the unrealized profit in Solo's beginning inventory?

According to IFRS principles, revenues and expenses resulting from intragroup transactions that require consolidation adjustments are to be made as follows:

Quick Company owns all of the outstanding shares of Peanut Ltd. During the year, Peanut Ltd. declared and paid a dividend of $10,000. The tax rate is 30% for both entities. In preparation for the year-end consolidated financial statements, what are the consolidated financial statement adjustments required?

A Canadian company that has wholly owned subsidiaries in countries that do not follow GAAP/IFRS accounting principles is not required to make adjustments for intragroup transactions.

In some intragroup transactions where there is management fee paid by one entity to another within the group there is no effect on the carrying amounts of assets and liabilities.

A parent issues one thousand $100 bonds at an interest rate of 5% and its wholly owned subsidiary acquires half of the bond issue. These transactions result in: