Deck 26: Consolidation: Intragroup Transactions

Question 1

If a dividend is paid out of profits that are earned after the acquisition date, it is known as:

A) a final dividend
B) a post-acquisition dividend
C) a temporary dividend
D) a pre-acquisition dividend.

Answer 1

B

Question 2

A subsidiary entity sold inventory to its parent entity at a profit of $8000. The goods had originally cost the subsidiary $20 000. At the end of the year all the inventory was still on hand. The adjustment entry to deal with this transaction on consolidation would include the following line item:

A) CR Cost of sales $28 000
B) CR Cost of sales $20 000
C) CR Cost of sales $12 000
D) CR Cost of sales $8 000.

Answer 2

B

Question 3

Andronico Limited provided an advance of $500 000 to its subsidiary Galactico Limited. On consolidation, the following adjustment is needed in relation to this intragroup advance:

A) no adjustment needed
B) $\text { DR } \quad \text { Advances to subsidiaries } \quad \$ 500,000$
$\text { CR Advances from parent } \quad \$ 500,000$
C) $\text { DR } \quad \text { Advances from parent } \quad \$ 500,000$
$\text { CR } \quad \text { Advances to subsidiaries } \quad \$ 500,000$
D) $\begin{array} { l l l l } \text { DR } & \text { Advances from parent } & \$ 500,000 & \\\text { CR } & \text { Cash } & & \$ 500,000\end{array}$

Answer 3

$\text { DR } \quad \text { Advances from parent } \quad \$ 500,000$
$\text { CR } \quad \text { Advances to subsidiaries } \quad \$ 500,000$

Question 4

The changes in accounting standards since year 2008 require:

A) dividends from pre-acquisition equity to be accounted for by parent as a return on investment in the subsidiary.
B) dividends from post-acquisition equity to be accounted for by parent as revenue.
C) all dividends from a subsidiary to be accounted for by parent as a return on investment in the subsidiary.
D) all dividends from a subsidiary to be accounted for by parent as revenue.

Question 5

During the year ended 30 June 20X7 a subsidiary entity sold inventory to a parent entity for $30 000. The inventory had previously cost the subsidiary entity $24 000. By 30 June 20X7 the parent entity had sold 75% of the inventory to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 20X8 is:

A) $\begin{array} { l l c r } \text { Sales revenue } & \mathrm { Dr } & 30,000 & \\\text { Cost of sales } & \mathrm { Cr } & 28,500 \\\text { Inventory } & \mathrm { Cr } & 1500 \\\text { Deferred tax asset } & \mathrm { Dr } & 450 & \\\text { Income tax expense } & \mathrm { Cr } & 450\end{array}$
B) $\begin{array} { l l r l } \text { Retained earnings } & \mathrm { Dr } & 1400 & \\\text { Income tax expense } & \mathrm { Dr } & 600 & \\\text { Cost of sales } & \mathrm { Cr } & & 2000\end{array}$
C) $\begin{array} { l l r l } \text { Retained earnings } & \mathrm { Dr } & 1050 & \\\text { Income tax expense } & \mathrm { Dr } & 450 & \\\quad \text { Cost of sales } & \mathrm { Cr } & & 1500\end{array}$
D) $\begin{array} { l l c r } \text { Retained earnings } & \mathrm { Dr } & 1500 & \\\text { Inventory } & \mathrm { Cr } & 1500 \\\text { Deferred tax asset } & \mathrm { Dr } & 450 & \\\text { Retained earnings } & \mathrm { Cr } & 450\end{array}$

Question 6

JoJo Ltd provided an advance of $500 000 to its subsidiary BoBo Ltd. Interest of $50 000 was charged during the year ended 30 June 20X8. On consolidation, the following adjustment is needed at 30 June 20X8 in relation to the interest charged:

A) no adjustment needed
B) $\begin{array}{lrrr}\text { DR } & & \text { Interest revenue } & \$ 50,000 \\& \mathrm{CR} & \text { Interest expense } & \$ 50,000\end{array}$
C) $\text { DR } \quad \text { Interest expense } \quad \$ 50,000$
$\text { CR } \quad \text { Interest revenue } \quad \$ 50,000$
D) $\text { DR } \quad \text { Retained earnings } \quad \$ 50,000$
$\text { CR } \quad \text { Cash } \quad \$ 50,000$

Question 7

A subsidiary entity sold inventory to a parent entity for $30 000. The inventory had previously cost the subsidiary entity $24 000. By reporting date the parent entity had sold 75% of the inventory to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at reporting date is:

A) $\begin{array} { l l l r } \text { Sales revenue } & \mathrm { Dr } & 30000 & \\\quad \text { Cost of sales } & \mathrm { Cr } & 24000 \\\quad \text { Inventory } & \mathrm { Cr } & 6000 \\\text { Deferred tax asset } & \mathrm { Dr } & 1800 & \\\quad \text { Income tax expense } & \mathrm { Cr } &1800\end{array}$
B) $\begin{array} { l l c r } \text { Sales revenue } & \mathrm { Dr } & 30000 & \\\quad \text { Cost of sales } & \mathrm { Cr } & 28500 \\\text { Inventory } & \mathrm { Cr } &1500 \\\text { Deferred tax asset } & \mathrm { Dr } & 450 & \\\text { Income tax expense } & \mathrm { Cr } & 450\end{array}$
C) $\begin{array} { l l c r } \text { Sales revenue } & \mathrm { Dr } & 22500 & \\\quad \text { Cost of sales } & \mathrm { Cr } & 18000 \\\text { Inventory } & \mathrm { Cr } & 4500 \\\text { Deferred tax asset } & \mathrm { Dr } & 1350 & \\\text { Income tax expense } & \mathrm { Cr } & 1350\end{array}$
D) $\begin{array} { l l c c } \text { Sales revenue } & \mathrm { Dr } & 7500 & \\\text { Cost of sales } & \mathrm { Cr } & 6000 \\\text { Inventory } & \mathrm { Cr } & 1500 \\\text { Deferred tax asset } & \mathrm { Dr } & 450 & \\\text { Income tax expense } & \mathrm { Cr } & 450\end{array}$

Question 8

Janus Limited, a subsidiary entity, sold a non-current asset at a profit to its parent entity. The adjustment necessary on consolidation to reflect the tax effect of this transaction will result in an:

A) increase in deferred tax assets.
B) decrease in deferred tax liabilities.
C) increase in retained earnings.
D) decrease in retained earnings.

Question 9

The test indicating that an intragroup business transaction has been realised is:

A) the involvement of an external party in the transaction.
B) the generation of profit from the transaction.
C) whether or not an operating profit or loss occurred as a result of the transaction.
D) the presence of only entities within the group as parties to the transaction.

Question 10

A parent entity group sold a depreciable non-current asset to a subsidiary entity for $2800. The asset originally cost $3000 and at the date of sale accumulated depreciation was $500. The amount of the unrealised gain on sale to be eliminated is:

A) $2800
B) $500
C) $300
D) $200

Question 11

AASB 10 Consolidated Financial Statements, requires that intragroup transactions be:

A) eliminated on consolidation to the extent of the parent's interest in the subsidiary.
B) adjusted for in the books of the parent and subsidiary to the extent of the parent's interest in the subsidiary.
C) adjusted for in full in the books of the parent and subsidiary.
D) eliminated in full on consolidation.

Question 12

The realisation of the profit or loss on a depreciable asset transferred within the group:

A) is assumed to occur when the future benefits embodied in the asset are consumed by the group.
B) occurs when the asset is sold to an external party.
C) results in an inconsistent pattern with the allocation of depreciation of the asset.
D) is assumed to occur when an external entity becomes directly involved with the asset.

Question 13

A subsidiary entity sold inventory to its parent entity at a profit of $4000. The goods had originally cost the subsidiary $10 000. At the end of the year all the inventory was still on hand. The adjustment entry to deal with this transaction on consolidation would include the following line item:

A) CR Inventory $4 000
B) CR Inventory $6 000
C) CR Inventory $10 000
D) CR Inventory $14 000

Question 14

When an entity sells a non-current asset at a profit to another entity within the same group the following adjustment is necessary on consolidation:

A) DR $\quad$ Asset
CR $\quad$ Cash
B) DR $\quad$ Cash
CR $\quad$ Asset
C) $\begin{array} { l l } \text { DR } & \text { Gain on sale } \\CR& \text { Asset }\end{array}$
D) DR $\quad$ Asset
CR $\quad$ Gain on sale.

Question 15

A Ltd sold an item of plant to B Ltd on 1 January 20X7 for $25 000. The asset had cost A Ltd $30 000 when acquired on 1 January 20X5. At that time the useful life of the plant was assessed at 6 years. The adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 20X8 will result in:

A) an increase in retained earnings and a decrease in current year profit.
B) a decrease in retained earnings and an increase in current year profit.
C) an increase in retained earnings and an increase in current year profit.
D) a decrease in retained earnings and a decrease in current year profit.

Question 16

In May 20X7, a parent entity sold inventory to a subsidiary entity for $30 000. The inventory had previously cost the parent entity $24 000. The entire inventory is still held by the subsidiary at reporting date, 30 June 20X7. Ignoring tax effects, the adjustment entry in the consolidation worksheet at reporting date is:

A) $\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 24,000 & \\\quad \text { Sales revenue } & \mathrm { Cr } & & 24,000 \\\text { Cost of sales } & \mathrm { Dr } & 24,000 & \\\quad \text { Inventory } & \mathrm { Cr } & & 24,000\end{array}$
B) $\begin{array} { l l l l } \text { Sales revenue } & \mathrm { Dr } & 24,000 & \\\quad \text { Cash } & \mathrm { Cr } & & 24,000 \\\text { Inventory } & \mathrm { Dr } & 24,000 & \\\quad \text { Cost of sales } & \mathrm { Cr } & & 24,000\end{array}$
C)
$\begin{array}{llr}\text { Sales revenue }& \mathrm{Dr}&30,000\\\text { Cost of sales } & \mathrm{Cr} & 6,000 \\\text { Inventory } & \mathrm{Cr} & 24,000\end{array}$
D) $\begin{array}{llr}\text { Sales revenue } & \mathrm{Dr} & 30,000\\\text { Cost of sales } & \mathrm{Cr} & 24,000 \\\text { Inventory } & \mathrm{Cr} & 6,000\end{array}$

Question 17

During the year ended 30 June 20X7, a parent entity rents a warehouse from a subsidiary entity for $100 000. The company tax rate is 30%. The consolidation adjustment entry needed at reporting date is:

A) $\begin{array} { l l l l } \text { Rent revenue } & \mathrm { Dr } & 100,000 & \\\text { Rent expense } & \mathrm { Cr } & & 100,000\end{array}$
B) $\begin{array} { l l l l } \text { Rent revenue } & \mathrm { Dr } & 100,000 & \\\text { Rent expense } & \mathrm { Cr } & & 100,000 \\\text { Income tax expense } & \mathrm { Dr } & 30,000 & \\\text { Deferred tax liability } & \mathrm { Cr } & & 30,000\end{array}$
C) $\begin{array} { l l l l } \text { Rent revenue } & \mathrm { Dr } & 100,000 & \\\text { Rent expense } & \mathrm { Cr } & 100,000 \\\text { Deferred tax asset } & \mathrm { Dr } & 30,000 & \\\text { Income tax expense } & \mathrm { Cr } & 30,000\end{array}$
D) $\begin{array} { l l l l } \text { Rent expense } & \mathrm { Dr } & 100,000 & \\\text { Rent revenue } & \mathrm { Cr } & & 100,000\end{array}$

Question 18

A Ltd sold an item of plant to B Ltd on 1 January 20X7 for $25 000. The asset had cost A Ltd $30 000 when acquired on 1 January 20X5. At that time the useful life of the plant was assessed at 6 years. The adjustment necessary on consolidation to reflect the tax effect of the depreciation adjustment for the year ended 30 June 20X7 will result in an increase in:

A) deferred tax assets.
B) deferred tax liabilities.
C) income tax expense.
D) current tax liability.

Question 19

The followings are the key questions to consider when determining the appropriate consolidation adjustment entries, except:

A) Does the transaction involve parent entity selling assets to subsidiary, or subsidiary selling assets to parent entity?
B) What is the tax effect of the adjustments made?
C) What has been recorded by the legal entities?
D) Is this a prior period or a current period transaction?

Question 20

Angelo Limited sold inventory to its parent entity at a profit of $4000. The inventory cost Angelo Limited $16 000. At balance sheet date the parent had sold 50% of the inventory to an external party. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to:

A) $2 000
B) $4 000
C) $12 000
D) $16 000

Question 21

Winter Limited paid an interim dividend of $5 000 to its parent entity. If the tax rate is 30%, what would be the adjustment made in the consolidation entry to record the tax effect of this transaction?
I made a change to the original question, as the original question is very similar to Q4.

A) No tax effect entry required.
B) DR Deferred Tax Asset $1 500
C) DR Income Tax Expense $1 500
D) DR Retained Earnings $1 500

Question 22

The consolidation adjustments in relation to intragroup borrowings:
I made a change to the original question, as the original question is the same as Q11.

A) increase the group's net assets.
B) increase the group's interest revenue.
C) do not require tax-effect entry.
D) decrease the group's income tax expense.

Question 23

When a subsidiary declares a final dividend payable to a parent who has a 100% interest in the subsidiary, the parent recognises a dividend receivable and the subsidiary recognises a dividend payable. In addition to the elimination of these two items on consolidation, the following items must also be eliminated:

A) Dividend declared and Retained earnings.
B) Dividend declared and Dividend revenue.
C) Dividend revenue and Cash.
D) Dividend declared and Cash.

Question 24

Jameson purchased goods from its subsidiary for $10 000. The goods cost the subsidiary $6000. The company rate of tax is 30%. Which of the following consolidation adjustment entries is correct?

A) DR Tax expense $1 200, CR Deferred tax liability $1 200
B) DR Tax expense $1 200, CR Deferred tax asset $1 200
C) DR Deferred tax asset $1 200, CR Tax expense $1 200
D) DR Deferred tax liability $1 200, CR Tax expense $1 200

Question 25

A parent entity made an advance of $50 000 to its subsidiary. The parent charges interest of $3000 on this advance. The consolidation adjustment to eliminate the advance is:

A) DR Interest revenue $\quad\$ 53000$
CR Interest expense $\quad\$ 53000$
B) DR Interest expense $\quad$ $\$ 53,000$
$\quad$ CR Interest revenue $\quad$$\$ 53,000$
C) DR Advance to subsidiary $\quad$$\$ 50,000$
$\quad$ CR Advance from parent $\quad$ $\$ 50,000$
D)DR Advance from parent $\quad$ $\$ 50,000$
$\quad$ CR Advance to subsidiary $\quad$$\$ 50,000$

Question 26

With the transfer of services within the group:
I made a change to the original question, as the original question is very similar to Q16.

A) there will be an increase in deferred tax assets.
B) the consolidation adjustments do not affect profit of the group.
C) the group's profit equals service revenue less service expense.
D) there will be an increase in income tax expense.

Question 27

When eliminating an intragroup service which of the followings would appear in the consolidation worksheet entry?

A) Dr Services expense
B) Dr Services revenue
C) Cr Income tax expense
D) Cr Deferred tax liability

Question 28

A subsidiary sold inventory to its parent entity in Year 1 at a profit of $5000. At balance sheet date the parent had not sold the inventory. The company tax rate is 30%. The Year 1 consolidation worksheet will contain the following adjustment entry for inventory:

A) DR Inventory $5 000
B) DR Inventory $ 3 500
C) CR Inventory $5 000
D) CR Inventory $3 500

Question 29

A Ltd sells to J Ltd an item of inventory on 1 January 20X3 for $6 000. The item cost A Ltd $3 000 earlier in the current year. J Ltd intends to use the item as plant with a useful life of 10 years, and no estimated salvage value. A straight-line depreciation rate of 10% p.a. is applicable. The tax rate is 30%. The worksheet entry for the year ended 30 June 20X3 would include the following adjustment:

A) DR Plant 3 000
B) CR Plant 3 000
C) DR Inventory 3 000
D) CR Inventory 3 000

Question 30

On 16 May 20X4, Z Ltd sold equipment to N Ltd for $75 000. The equipment had a carrying amount at time of sale of $60 000. The equipment was depreciated by Z Ltd at 10% p.a. on cost, while N Ltd applies a rate of 8%. The consolidation worksheet entry for the year ended 30 June 20X4 would include the following adjustment in relation to depreciation:
I made a change to the original question, as the original question is exactly the same as in the Illustrative Example 26.2 on p.870.

A) DR Depreciation Expense $\quad 1680$
CR Accumulated Depreciation $\quad 1680$
B)DR Accumulated Depreciation $\quad 1680$
CR Depreciation Expense $\quad 1680$
C) DR Depreciation Expense $\quad 2100$
CR Accumulated Depreciation $\quad 2100$
D) $\text { DR Accumulated Depreciation } \quad 2100$
$\text { CR Depreciation Expense \quad\quad} 2100$