Question 1

A parent company owns 80% of the issued capital of its subsidiary.On consolidation a sale of inventories between parent and subsidiary will be eliminated as follows:

Accepted Answer

A)   20% of sale amount
B)   80% of sale amount
C)   100% of sale amount
D)   not eliminated C

Question 2

Explain why temporary differences (and therefore deferred tax adjustments)arise when depreciable assets are sold at a profit on an intra-group basis.

Accepted Answer

Temporary differences on intra group sale of depreciable assets:
- When a depreciable asset is sold at a profit on an intra group basis,a temporary difference arises because the tax base is based on the cost of the asset to the purchasing company and the carrying amount will be based on the original cost to the group
- The temporary difference gives rise to a deferred tax asset

Question 3

Discuss the basis of recognition of tax effects relating to accrued revenue and expenses for such intra-group items as management fees and interest

Accepted Answer

Tax effects relating to accrued revenue and expenses:
- Accruals of revenue and expense for intra group service fees and interest do not give rise to tax effects
- Accrued service fees payable and receivable have a tax base equal to the carrying amount and there are no tax implications
- In relation to accrued interest on intra group loans there is a deferred tax effect because accounting accruals of interest receivable and payable create deferred tax liabilities and assets respectively
- It is unlikely that the deferred tax assets and liabilities can be offset as a group does not meet the offset requirements of AASB112

Question 4

Explain why some consolidation adjusting entries are required to be carried forward to future years.

Accepted Answer

The answer of Explain why some consolidation adjusting entries are...

Question 5

P Ltd sold an item of property plant and equipment to its subsidiary S Ltd on the following basis: cost to P Ltd $24,000.The equipment is 3 years old and had been depreciated at 10% per annum straight line.Sale Price was $20,000.The gain recorded by P Ltd on sale would be:

Accepted Answer

A)   $20,000
B)   $4,000
C)   $3,200
D)   nil

Question 6

A consolidation adjustment will have a tax effect if:

Accepted Answer

A)   it adjusts the carrying amount of an asset
B)   it adjusts the carrying amount of a liability
C)   it recognises assets and liabilities not recorded in accounting records of group companies
D)   all of the above

Question 7

P Ltd sells inventory to its subsidiary S Ltd on the following basis: cost to P $60,000,sale price to S $80,000.All inventory is held by S at the end of the financial year (assume a tax rate of 30%).The periodic method is used to account for inventory.Therefore,the following consolidation entries are required:

Accepted Answer

A)   
B)   
C)   
D)   None of the above

Question 8

For assets valued using the revaluation model consolidation adjustment will be required :

Accepted Answer

A)   when there is a revaluation increment
B)   when there is a revaluation decrement
C)   for both a revaluation increment and decrement
D)   no adjustment required

Question 9

A loss on intra-group sales of inventory will be regarded as realised by the group at the time of the sale only if the transfer price represents the net realisable value of the inventories

Accepted Answer

A) True 
 B)False

Question 10

For non current assets measured using the revaluation model no consolidation adjustment is required for fair value increases or decreases.

Accepted Answer

A) True 
 B)False

Question 11

A subsidiary which is 75% owned by its parent company pays a dividend of $100,000.On consolidation the amount to be eliminated is:

Accepted Answer

A)   $75,000
B)   $100,000
C)   $25,000
D)   Not eliminated

Question 12

P Ltd provides management services to its subsidiary company S Ltd for $100,000 per year.At the end of the current year S Ltd owes $20,000 of this fee.The entry required on consolidation is:

Accepted Answer

A)   DR Management Fee Revenue $100,000 CR Management Fee Expense $100,000
B)   DR Management Fee Revenue $100,000 CR Management Fee Expense $100,000DR Accrued Fees Payable $20,000CR Accrued Fees Receivable $20,000
C)   DR Management Fees Revenue $80,000 CR Management Fees Expense $80,000
D)   None of the above

Question 13

When a depreciable asset is sold at a profit on an intra-group basis,a consolidation entry is required to recognise a deferred tax asset

Accepted Answer

A) True 
 B)False

Question 14

Explain why cash will never be adjusted in consolidation journal entries

Accepted Answer

The answer of Explain why cash will never be adjusted...

Question 15

Assuming the same facts as for Question 12 but that 2 years later S sold the land outside the group for $1,200,000 the consolidation journal entry required would be (ignoring tax effects):

Accepted Answer

A)   
B)  
C)  
D)   no entry required

Question 16

Explain why it is necessary to adjust unrealised profit in opening inventory on consolidation

Accepted Answer

The answer of Explain why it is necessary to adjust...

Question 17

Unrealised profits on the intra-group sale of inventory will only be eliminated on consolidation in the year in which they arise

Accepted Answer

A) True 
 B)False

Question 18

Tax effect adjustments only apply to consolidation adjusting entries which affect the carrying amount of parent subsidiaries

Accepted Answer

A) True 
 B)False

Question 19

Unrealised profits on intra-group sale of inventories arise if:

Accepted Answer

A)   the sale is an upstream transaction
B)   the sale is a downstream transaction
C)   the inventories are held within the group at date of consolidation
D)   none of the above

Question 20

Unrealised gains and losses on intra-group sales of non-depreciable assets can only be realised by sale outside the group.

Accepted Answer

A) True 
 B)False

Exam 4: Intra-Group Transactions

A parent company owns 80% of the issued capital of its subsidiary.On consolidation a sale of inventories between parent and subsidiary will be eliminated as follows:

Explain why temporary differences (and therefore deferred tax adjustments)arise when depreciable assets are sold at a profit on an intra-group basis.

Discuss the basis of recognition of tax effects relating to accrued revenue and expenses for such intra-group items as management fees and interest

Explain why some consolidation adjusting entries are required to be carried forward to future years.

P Ltd sold an item of property plant and equipment to its subsidiary S Ltd on the following basis: cost to P Ltd $24,000.The equipment is 3 years old and had been depreciated at 10% per annum straight line.Sale Price was $20,000.The gain recorded by P Ltd on sale would be:

A consolidation adjustment will have a tax effect if:

For assets valued using the revaluation model consolidation adjustment will be required :

A loss on intra-group sales of inventory will be regarded as realised by the group at the time of the sale only if the transfer price represents the net realisable value of the inventories

For non current assets measured using the revaluation model no consolidation adjustment is required for fair value increases or decreases.

A subsidiary which is 75% owned by its parent company pays a dividend of $100,000.On consolidation the amount to be eliminated is:

P Ltd provides management services to its subsidiary company S Ltd for $100,000 per year.At the end of the current year S Ltd owes $20,000 of this fee.The entry required on consolidation is:

When a depreciable asset is sold at a profit on an intra-group basis,a consolidation entry is required to recognise a deferred tax asset

Explain why cash will never be adjusted in consolidation journal entries

Assuming the same facts as for Question 12 but that 2 years later S sold the land outside the group for $1,200,000 the consolidation journal entry required would be (ignoring tax effects) :

Explain why it is necessary to adjust unrealised profit in opening inventory on consolidation

Unrealised profits on the intra-group sale of inventory will only be eliminated on consolidation in the year in which they arise

Tax effect adjustments only apply to consolidation adjusting entries which affect the carrying amount of parent subsidiaries

Unrealised profits on intra-group sale of inventories arise if:

Unrealised gains and losses on intra-group sales of non-depreciable assets can only be realised by sale outside the group.