Deck 13: Consolidation: Intragroup Transactions

Question 1

Explain the need for depreciation consolidation adjustments relating to intragroup sales of depreciable assets.

Answer 1

When a depreciable asset is transferred between entities in an economic entity,the acquiring entity depreciates the asset based on its cost (that is,the sale price)over the expected remaining life of the asset.If there is an intragroup sale of an asset at a gain or loss,the depreciation applied by the acquiring entity will not be that applicable to the economic entity.Therefore,adjustments will be required to restate the depreciation charged in the consolidated accounts,and income tax expense,to the amount applicable to the economic entity (that is,eliminating the effects of the intragroup transaction).Continuing consolidation adjustments are required each year while the transferred asset remains within the economic entity.When preparing consolidated accounts in periods after the transfer of the asset,the consolidation adjustment must take into account the depreciation adjustment applicable to both prior periods and the current period.The effects of adjustments for depreciation expense applicable to prior years are made against the opening balance of retained earnings.The tax effects of the depreciation consolidation adjustments must also be considered.The deferred tax asset or deferred tax liability created by the tax- effect entry for the elimination of the profit or loss on sale will be reversed.The other side of the journal entry will be an adjustment to income tax expense.

Question 2

Transactions that have taken place between individual entities of an economic entity are known as:

A)intraequity transactions
B)intergroup transactions
C)intragroup transactions
D)none of the above

Answer 2

C

Question 3

A parent company sells some inventory to its subsidiary for $5000.The original cost of the inventory to the parent was $4000.The economic entity only makes a profit when:

A)the subsidiary resells the inventory back to the parent
B)the subsidiary resells the inventory outside the group
C)the parent sells the inventory to the subsidiary
D)none of the above

Answer 3

B

Question 4

If a non- current asset is sold between two entities in a group:

A)a consolidation adjustment is required to eliminate the effect of the intragroup transaction
B)any gain or loss on sale must be eliminated from the consolidated accounts
C)there has been either a gain or loss on the intragroup sale of the asset
D)both A and B

Question 5

Provide examples of intragroup borrowings and discuss why it is necessary to make consolidation adjustments to eliminate them.

Question 6

When a parent company purchases shares in a subsidiary company for cash and the shares are cum div,the journal entry in the parent's accounts is:

A)Debit Shares in subsidiary Debit Dividend receivable Credit Cash
B)Debit Shares in subsidiary Credit Cash Credit Dividend payable
C)Debit Dividend payable Credit Cash
D)Debit Cash Credit Dividend revenue

Question 7

Discuss why it is necessary to make consolidation adjustments for intragroup sales of depreciable assets.

Question 8

Which of the following statements is incorrect?

A)AASB 127 specifies that intragroup balances,transactions,income and expenses shall be eliminated in full
B)a new consolidation is carried out each year,with no adjustments being made in the separate legal accounts of the consolidated group members
C)the purpose of consolidated accounts is to show the operating result and financial position of the economic entity in its dealings with entities outside the group
D)only the parent company's share of the subsidiary needs to be eliminated in relation to intragroup transactions

Question 9

Which of the following statements is incorrect?

A)adjustments for unrealised profit in opening inventory would also be required in the following accounting period if this inventory were not sold in the current period
B)the opening inventory held by an entity at the start of one period becomes the closing inventory in the profit and loss summary for the next period
C)the closing inventory held by an entity at the end of one period becomes the opening inventory in the profit and loss summary for the next period
D)from an economic entity viewpoint,the opening inventory of the economic entity will be overstated if a consolidation adjustment is not made to eliminate the unrealised profit in opening inventory

Question 10

Explain intragroup services and identify why they need to be eliminated on consolidation.

Question 11

When a final dividend is not legally payable until sanctioned by the annual general meeting:

A)approval of payment is not generally a formality given that the parent entity has control of the subsidiary
B)a parent cannot recognise,as revenue,a dividend proposed by a subsidiary prior to its receipt
C)approval of payment is generally a formality given that the parent entity has control of the subsidiary
D)none of the above

Question 12

No tax- effect adjustments are necessary in relation to the consolidation elimination of intragroup services because:

A)no temporary differences exist between the accounting and tax bases of any assets or liabilities arise due to these elimination entries
B)no adjustment has been made to any expense or income accounts
C)no adjustment has been made to any asset or liability accounts
D)both A and C

Question 13

Explain the need for consolidation adjustments in relation to intragroup sales of inventory.

Question 14

Examples of intragroup transactions include:

A)rental of premises and equipment
B)provision of specialist services to one entity by staff from another entity
C)management fees
D)all of the above

Question 15

Which of the following statements regarding the tax effect of dividends is incorrect?

A)no tax- effect entry is required for entries eliminating dividend revenue on intragroup dividends
B)no tax is normally payable on the dividends received given the operation of the tax rebate
C)a parent entity which is a public company is entitled to a rebate of tax on dividends from a resident company subsidiary
D)a tax- effect entry is required for entries eliminating dividend revenue on intragroup dividends

Question 16

The journal entry by a subsidiary to record the declaration of a final dividend at the end of the financial year includes a:

A)Credit to Dividend receivable
B)Credit to Dividend payable
C)Debit to Final dividend proposed
D)both B and C

Question 17

For an interim dividend declared and paid during the current period by a subsidiary to its parent,the two accounts to be eliminated in the consolidation elimination entry are:

A)dividend revenue and dividend receivable
B)dividend payable and interim dividend declared
C)dividend revenue and interim dividend declared
D)dividend payable and dividend receivable

Question 18

Intragroup borrowings must be eliminated because:

A)interest paid on these borrowings does not represent a transaction with external parties
B)these amounts owing represent borrowings with parties external to the economic entity
C)these amounts owing do not represent borrowings with parties external to the economic entity
D)both A and C