Deck 20: Intra-Group Transactions

Question 1

Waverley Ltd sold a non-current asset to Park Ltd on 1 January 20X0 for a profit of $100 000.The sale proceeds was $1 000 000.Waverley Ltd had paid $1 800 000 for this asset.Both companies have a financial year end of 31 December.Waverley was depreciating this asset straight-line over a total useful life of 10 years to a zero residual amount.The asset had a carrying amount of $900 000 on the sale date.Park Ltd uses the same useful life and residual value as Waverley Ltd.What is the last financial year that elimination entries will be required for this asset? The financial year ended 31 December:

A)2004
B)2005
C)2006
D)None of the above

Answer 1

D

Question 2

Tammam Ltd is the parent of Shud Ltd.On 1 January 20X3 Tammam sold inventory to Shud for $20 000.The profit margin on this inventory was $5 000.On 1 May 20X3, as a result of impairment testing, Shud was forced to write down the inventory to $10 000.As of end of financial year, June 30, Shud still held all of this inventory.
Which is the correct set of consolidation elimination entries for June 30 20X3 in respect of the inventory?

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 5000 & \\\text { Inventory } & & 5000\end{array}$


B) $\begin{array}{llcc} \text { Sales } &20000 \\ \text {Cost of sales } &&20000 \\\\ \text { Cost of sales } &10000\\ \text {Inventory } &&10000\\\end{array}$


C) $\begin{array}{llcc} \text { Sales} & 20000 \\ \text { Cost of sales } &&20000\\ \end{array}$


D) $\begin{array}{llcc} \text { Sales } &20000 \\ \text {Impairment expense-inventory } &&5000 \\ \text { Cost of sales } &&25000\\\end{array}$

Answer 2

$\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 5000 & \\\text { Inventory } & & 5000\end{array}$

Question 3

On 1 July 20X0 Home Ltd lent $10 million to its wholly-owned subsidiary - Loan Ltd.The loan is for a term of 10 years at a fixed rate of 15% per annum.Loan Ltd pays this interest each year on 30 June.What is the elimination entry for the year ended 30 June 2001?

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Loan receivable } & 10000000 & \\\text { Loan payable } & & 10000000 \\\text { Interest revenue } & 1500000 & \\\text { Interest expense } & & 1500000\end{array}$
B) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Loan receivable } & & 10000000 \\\text { Loan payable } & 10000000 &\end{array}$

C) $\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\\text { Loan receivable } & & 10000000 \\\text { Loan payable } & 10000000 & \\\text { Interest revenue } & 1500000 & \\\text { Interest expense } & & 1500000\end{array}$

D) $\begin{array} { l r c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Interest revenue } & 1500000 & \\\text { Interest expense } & & 1500000\end{array}$

Answer 3

$\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\\text { Loan receivable } & & 10000000 \\\text { Loan payable } & 10000000 & \\\text { Interest revenue } & 1500000 & \\\text { Interest expense } & & 1500000\end{array}$

Question 4

Tammam Ltd is the parent of Shud Ltd.On 1 January 20X3 Tammam sold inventory to Shud for $20 000.The profit margin on this inventory was $5 000.As of end of financial year, June 30, Shud still held all of this inventory.
Which is the correct set of consolidation elimination entries for June 30 20X3 in respect of the inventory?

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 5000 & \\\text { Inventory } & & 5000\end{array}$

B) $\begin{array}{llcc} \text { Sales} & 15000 \\ \text { Cost of sales } &&15000\\ \end{array}$

C) $\begin{array}{llcc} \text { Sales} & 20000 \\ \text { Cost of sales } &&20000\\ \end{array}$

D) $\begin{array} { l r l } \text { Sales } & 20000 \\\text { Impairment expense-inventor } & 5000 \\\text { Cost of sales } & & 25000\end{array}$

Question 5

Pink Ltd is the parent Floyd Ltd.On 1 January 20X3 Pink made a loan to Floyd in the form of bills of exchange in the total amount of $80 000 face value.Floyd was required to repay the $80 000 amount (which included the interest component) on 1 October 20X3.On 1 February Pink discounted $20 000 of the bills with the Darkside bank, without recourse, and received $15 000 cash.Floyd was unaware of the discounting.The end of financial reporting year for the group is 30 June.
Which is the correct set of consolidation entries for June 30 20X3 in respect of the bills of exchange?:

A)
$\begin{array}{llcc}\text { Accounts} &\text { Debit \$} &\text { Credit \$ } \\ \text {(Adjustments column) } & \\ \text { Bills payable-to Pink } &20000\\ \text {Bills payable-to others } &&20000\\ \text {(Eliminations column) } &\\ \text { Bills payable } &60000\\ \text { Bills receivable } &&60000\\\end{array}$



B)
$\begin{array}{llcc} \text {(Adjustments column) } & \\ \text { Bills payable-to Pink } &150000\\ \text {Bills payable-to others } &&150000\\ \text {(Eliminations column) } &\\ \text { Bills payable } &65000\\ \text { Bills receivable } &&65000\\\end{array}$

C)
$\begin{array}{llcc} \text {(Adjustments column) } & \\ \text { Bills payable-to Pink } &20000\\ \text {Bills payable-to others } &&20000\\ \text {(Eliminations column) } &\\ \text { Bills payable } &60000\\ \text { Bills receivable } &&60000\\\end{array}$


D)
Contingent liability $\quad$ $\quad$ $\quad$ 80000
(not double entry)

Question 6

Where the drawer and acceptor are both members of the same group, which of the following statements is true:

A)Bills held to maturity appear in group data as both a receivable and payable and are eliminated just like any other intra-group debt
B)Bills discounted without recourse cease to be intra-group debts and ought not to be eliminated
C)Bills discounted with recourse give rise to a contingent liability which should be eliminated
D)All of the above

Question 7

You hear the following statement made at a conference:
'If, on 1 September 20X3 a company lent money to its wholly owned subsidiary, with interest payable annually in arrears for five years; then the only journal entry required when preparing the consolidated profit or loss statement for the year ending 30 June 20X5 would be to debit the interest income account and credit the interest expense account.'
This statement is:

A)correct, because no other entries are required
B)incorrect, because the interest income has to be credited and interest expense debited.
C)incorrect, because the interest revenue and the interest expense do not have to be eliminated
D)incorrect, because the asset and the liability have to be eliminated also

Question 8

Greenstreet Ltd owns 100% of the issued ordinary share capital of Bogart Ltd.During the year ended 31 March 20X1, Greenstreet Ltd provides cleaning services to Bogart Ltd for $4 000 000.The cost at fair value of these services was $1 000 000.Which consolidation elimination entry is required for this transaction for the year ended 31 March 20X1.

A)
$\begin{array}{lcc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$\$ } \\\text { Cleaning services revenue } & 4000000 & \\\text { Cleaning services expense } & & 4000000\end{array}$

B)
$\begin{array}{lcc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$\$ } \\\text { Cleaning services revenue } & 4000000 & \\\text { Cleaning services expense } & & 4000000\end{array}$ .

C)
$\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Cleaning services revenue } & 3000000 & \\\text { Cleaning services expense } & & 3000000\end{array}$ .
D)No elimination entry is required because there is no inventory on hand

Question 9

Belgium Ltd is the parent of France Ltd.On 1 January 20X3 Belgium sold a plant to France for $120 000.The plant had cost Belgium $100 000 on 1 January 20X1 and had been depreciated straight line over ten years with no scrap value.France used the same depreciation estimates but based their depreciation amounts on the transfer sale price.Both companies use the cost model.
Which is the correct set of consolidation elimination entries for 31 December 20X4 in respect of the plant?

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Retained profits } & 60000 & \\\text { Depreciation expense } & & 5000 \\\text { Accumulated depreciation } & & 10000 \\\text { Plant } & & 45000\end{array}$
B) $\begin{array}{lll}\text { Retained profits } & 35000 & \\\text { Accumulated depreciation } & & 15000 \\\text { Plant } & & 20000\end{array}$

C) $\begin{array}{lll}\text { Retained profits } & 35000 & \\\text { Accumulated depreciation } & & 20000 \\\text { Plant } & & 55000\end{array}$

D) $\begin{array}{llcc} \text {Retained profits } &35000 \\ \text { Depreciation expense} &&5000\\ \text {Accumulated depreciation } &&10000\\ \text { Plant} &&20000\\\end{array}$

Question 10

Tammam Ltd is the parent of Shud Ltd.On 1 January 20X3 Tammam sold inventory to Shud for $20 000.The profit margin on this inventory was $5 000.As of end of financial year, June 30, Shud still held all of this inventory.The tax rate is 30%.
Which is the correct set of consolidation elimination entries for June 30 20X3 in respect of the inventory? This answer includes any tax-effect entries.

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 5000 & \\\text { Inventory } & & 5000 \\\text { Deferred tax asset } & 1500 & \\\text { Deferred tax revenue } & & 1500\end{array}$

B) $\begin{array}{llcc} \text { Sales } & 15000 \\ \text { Cost of sales} &&15000\\ \text { Deferred tax asset} &1500\\ \text { Deferred tax revenue} &&1500\\\end{array}$

C) $\begin{array}{llcc} \text { Sales } &20000 \\ \text { Cost of sales} &&20000\\ \text { Deferred tax asset} &1500\\ \text { Deferred tax revenue} &&1500\\\end{array}$


D) $\begin{array}{lrr}\text { Sales } & 20000 \\\text { Impairment expense-inventory } & 5000 & \\\text { Cost of sales } & & 25000 \\\text { Deferred tax revenue } & 1500 & \\\text { Deferred tax liability } & & 1500\end{array}$

Question 11

Tammam Ltd is the parent of Shud Ltd.On 1 January 20X3 Tammam sold inventory to Shud for $20 000.The profit margin on this inventory was $5 000.As of end of financial year, June 30, Shud still held half of this inventory.The tax rate is 30%.
Which is the correct set of consolidation elimination entries for June 30 20X3 in respect of the inventory? This solution includes any tax-effect items.

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 2500 & \\\text { Inventory } & & 2500 \\\text { Deferred tax asset } &750 & \\\text { Deferred tax revenue } & & 750\end{array}$

B) $\begin{array}{llcc} \text { Sales } &17500 \\ \text { Cost of sales} &&17500\\ \text { Deferred tax asset} &750\\ \text { Deferred tax revenue} &&750\\\end{array}$


C) $\begin{array}{lrr}\text { Sales } & 20000 \\\text { Cost of sales } & & 20000 \\\text { Deferred tax asset } & 1500 & \\\text {Deferred tax revenue } & & 1500 \end{array}$
D) $\begin{array} { l r r } \text { Sales } & 20000 \\\text { Impairment expense-inventory } & 2500 & \\\text { Cost of sales } & & 22500\\\text { Deferred tax expense } & 750 \\\text { Deferred tax liability } & & 750\end{array}$

Question 12

Wagner Ltd owns 100% of Korngold Ltd.For the year ended 30 April 20X1, Korngold Ltd reported a profit of $1 million.On 30 April 20X0, Korngold Ltd had sold inventory to Wagner Ltd for a $0.6 million profit.All of this inventory was sold by Wagner Ltd on 1 June 20X0.For the financial year ending in 20X3, what is the consolidation adjustment (if any) in the financial statements, as a result of the profit on this sale?

A)None, because all inventory was sold
B)Debit sales and cost of sales Credit inventory
C)Debit opening retained profits Credit inventory
D)Debit inventory Credit cost of sales

Question 13

Wagner Ltd owns 100% of Korngold Ltd.For the year ended 30 April 20X1, Korngold Ltd reported a profit of $1 million.On 30 April 20X0, Korngold Ltd had sold inventory to Wagner Ltd for a $0.6 million profit.All of this inventory was sold by Wagner Ltd on 1 June 20X0.For the financial year ending 30 April 20X0, what is the effect of consolidation adjustment (if any) in the profit or loss statement, as a result of the profit on this sale?

A)None, because all inventory was unsold
B)Reduce group profit by $400 000
C)Reduce group profit by $600 000
D)Increase group profit by $600 000

Question 14

Pink Ltd is the parent Floyd Ltd.On 1 January 20X3 Pink made a loan to Floyd in the form of bills of exchange in the total amount of $80 000 face value.Floyd was required to repay the $80 000 amount (which included the interest component) on 1 October 20X3.On 1 February Pink discounted $20 000 of the bills with the Darkside bank, with recourse, and received $15 000 cash.Floyd was unaware of the discounting.The end of financial reporting year for the group is 30 June.
Which is the correct set of consolidation entries for June 30 20X3 in respect of the bills of exchange?:

A)
$\begin{array}{lcc}\text { Accounts } & \text { Debit \$ } & \text { Credit } \$ \\\begin{array}{lll}\text { Adjustments column) } \\\text { Bills payable-to Pink }\end{array} & 20000 & \\\text { Bills payable-to others } & & 20000\end{array}$

B)
$\begin{array}{llcc} \text {(Adjustments column) } & \\ \text { Bills payable-to Pink } &15000\\ \text {Bills payable-to others } &&5000\\ \text {(Eliminations column) } &\\ \text { Bills payable } &65000\\ \text { Bills receivable } &&65000\\\end{array}$

C)
$\begin{array}{llcc} \text {(Adjustments column) } & \\ \text { Bills payable-to Pink } &20000\\ \text {Bills payable-to others } &&20000\\ \text {(Eliminations column) } &\\ \text { Bills payable } &60000\\ \text { Bills receivable } &&60000\\\end{array}$
.
D)
Contingent liability $\quad$ $\quad$ $\quad$ 80000
(not double entry)

Question 15

Pink Ltd is the parent Floyd Ltd.On 1 January 20X3 Pink made a loan to Floyd in the form of bills of exchange in the total amount of $80 000 face value.Floyd was required to repay the $80 000 amount (which included the interest component) on 1 October 20X3.On 1 February Pink discounted $20 000 of the bills with the Darkside bank and received $15 000 cash.The end of financial reporting year for the group is 30 June.
From the group point of view, with regard to the bills, Pink is the:

A)Acceptor
B)Drawer
C)Acceptor and the drawer
D)None of the above

Question 16

'If there are no intra-group transactions and no goodwill or discount on acquisition, the consolidated financial statements are an aggregate of those financial statements of the companies in a group.' This statement is:

A)true, because only intra-group transactions need to be considered in the preparation of group financial statements
B)false, because assets and equity of the group would be overstated
C)true, because only intra-group transactions and adjustments for differences on acquisition need to be considered in the preparation of group financial statements
D)false, because assets and equity would be understated

Question 17

'Intra-group transactions will never give rise to tax-effect assets or liabilities'

A)This statement is true because AASB 112 specifically excludes all intra-group transactions from its scope.
B)This statement is untrue because intra-group transactions will always give rise to group CA > CA.
C)This statement is untrue because some intra-group transactions will result in group balances being different to subsidiary balances.
D)This statement is untrue because AASB 112 specifically allows DTLs and DTAs to arise from inventory transactions.

Question 18

Bon Ltd owns 100% of the issued ordinary share capital of Jovi Ltd.On June 30 20X1, Bon Ltd issued 1000 eight year debentures of face amount $100 each, paying 10% pa interest.These debentures were issued to the general public, to persons not related to the Bon Group.On July 1 20X4 Jovi bought all these debentures on a stock exchange.The sale price totaled $80 000.What is the elimination entry (if any) for the financial year ended June 30 20X5?

A) $\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Debentures (liability) } & 100000 & \\\text { Debentures (asset) } & & 100000\end{array}$
B) $\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Debentures (liability) } & 100000 & \\\text { Debentures (asset) } & & 80000 \\\text { Gain on debt retirement } & & 20000\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Debentures (liability) } & 80000 & \\\text { Debentures (asset) } & & 80000\end{array}$
D)No elimination entry is required because the debentures were purchased from outside the group, thus constituting a real transaction

Question 19

Tammam Ltd is the parent of Shud Ltd.On 1 January 20X3 Tammam sold inventory to Shud for $20 000.The profit margin on this inventory was $5 000.As of end of financial year, June 30, Shud still held half of this inventory.
Which is the correct set of consolidation elimination entries for June 30 20X3 in respect of the inventory?

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Sales } & 20000 & \\\text { Cost of sales } & & 20000 \\\text { Cost of sales } & 2500 & \\\text { Inventory } & &2500\end{array}$


B) $\begin{array}{llcc} \text { Sales} & 17500 \\ \text { Cost of sales } &&17500\\ \end{array}$
C) $\begin{array}{llcc} \text { Sales} & 20000 \\ \text { Cost of sales } &&20000\\ \end{array}$

D) $\begin{array} { l r l } \text { Sales } & 20000 \\\text { Impairment expense-inventor } &&2 5000 \\\text { Cost of sales } & & 225000\end{array}$

Question 20

Stevie Ltd owns 100% of the issued ordinary share capital of Wright Ltd.Wright Ltd has 100 million ordinary shares on issue.During the year ended 31 March 20X1, Wright Ltd declared and paid an interim dividend of $0.15 per share from post-acquisition profits.What is the elimination entry (if any) for this financial year?

A) $\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Dividend revenue } & 15000000 & \\\text { Interim dividend (retained profits) } & & 15000000\end{array}$
B) $\begin{array} { l c c } \text { Accounts } & \text { Debit \$ } & \text { Credit } \$ \\\text { Investment in Wright Ltd } & 15000000 & \\\text { Interim dividend (retained profits) } & & 15000000\end{array}$
C) $\begin{array} { l r c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Dividend revenue } & 1500000 & \\\text { Dividend expense } & & 1500000\end{array}$

D)No elimination entry is required because the dividend is a post-acquisition dividend

Question 21

It is not necessary to eliminate intra-group profit when assets sold within the group are sold later, but within the same reporting period, to an external party.

Question 22

The following is the only consolidation elimination entry required for an intra-group loan made and repaid during the reporting period:
Dr Loan payable
Cr Loan receivable

Question 23

Subsidiary buys inventory from parent at a transfer price of $150 000.The profit margin included in this was $50 000.
The group will need to reduce its cost of sales by $100 000 in total.

Question 24

Parent sells plant to Subsidiary for $500 000 on January 1 20X9.The original cost to Parent was $400 000 on 1 January 20X7.The plant is depreciated straight line over ten years with no scrap value.
The correct consolidation elimination entry for the plant, at 1 January 20X9, is:
$\begin{array}{llcc} \text { Dr Profit on sale } &\$ 100000 \\ \text {Cr Plant } &&\$ 100000 \\\end{array}$

Question 25

Intra-group bills discounted with recourse during the reporting period require the following consolidation elimination:
Dr Bills payable
Cr Bills receivable

Question 26

When eliminating an intra-group sale of a non-current asset only the sale price and any profit on sale need be eliminated.

Question 27

The acceptor of a bill of exchange is conceptually the same as a borrower.

Question 28

When assets sold within the group are sold later, but within the same reporting period, to an external party, consolidated profit is then invariably the difference between the ultimate selling price and the original cost of the goods.

Question 29

Intra-group transactions on inventory always give rise to a deferred tax asset because CA>group CA.

Question 30

AASB 112 specifically exempts long-lived assets from giving rise to tax-effect assets and liabilities.