Deck 28: Further Consolidation Issues I: Accounting for Intragroup Transactions

Question 1

Parent Ltd sells inventories to Child Ltd amounting to $200 000 during the financial year.The inventories are no longer in the hands of Child Ltd at year-end.Parent Ltd is no longer required to eliminate these intragroup transactions because these transactions have been realised by sale to external parties.

Answer 1

False

Question 2

Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the parent entity's financial statements.

Answer 2

False

Question 3

Intragroup profits are eliminated in consolidation to reduce consolidated profits.

Answer 3

False

Question 4

If a subsidiary makes a dividend payment out of pre-acquisition earnings,the parent entity should consider whether its investment in the subsidiary is impaired.

Question 5

In the absence of an election to be a 'tax consolidated group',the Australian Tax Office assesses income earned by the individual legal entities in an economic group and does not take into consideration consolidation adjustments required for group accounts.

Question 6

Intragroup sales of non-current assets results in the need to eliminate the effect of any profit or loss on sale in the period of the sale and,in the rest of the periods of the asset's life,any tax effects of the profit or loss,the depreciation and accumulated depreciation will have to be adjusted for the life of the asset,along with the tax effects of the adjustment to depreciation.

Question 7

The level of equity ownership is not a factor in deciding what proportion of a transaction between entities in a group should be eliminated.

Question 8

Only dividends paid externally should be shown in the consolidated financial statements.

Question 9

If we simply aggregate the sales of the parent and subsidiary companies,without adjustment,when there have been intragroup sales,total income would be overstated.

Question 10

Intragroup transactions that are to be eliminated in the consolidated accounts include:

A) inter-entity loans.
B) inter-entity sales of non-current assets.
C) the payment of management fees to a member of the group.
D) all of the given answers.

Question 11

AASB 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation even where the parent entity holds only a fraction of the issued equity.

Question 12

Companies in an economic entity may increase the level of consolidated sales reported by selling inventory between themselves.

Question 13

Examples of intragroup transactions include:

A) dividends payable to group members.
B) the payment of taxation.
C) the recognition of minority interests.
D) the sale of inventories to external parties.

Question 14

The term 'cum div' is used when shares are being bought with a dividend entitlement.

Question 15

Company A owns 51% of the issued capital of Company B and Company A owns 60% of the issued capital of Company
C. Company A controls both B and
C. If Company A sells inventory for $500 000 to Company C and Company C sells it to Company B for $600 000 and Company B sells it to an entity external to the group for $700 000, the amount of sales revenue to be recorded for that inventory for the group of companies is $1 560 000.

Question 16

The value of inventory on hand for the economic group at the end of the period will always equal the sum of the inventory on hand at the end of the period for each of the entities in the group.

Question 17

AASB 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation.This requirement is consistent with the parent entity concept of consolidation.

Question 18

Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits by a subsidiary company.Where dividends are paid out of post-acquisition profits the investment in the subsidiary should be decreased by the amount of the dividend.

Question 19

Transactions between entities that form an economic group should be eliminated in proportion to the level of control between the parent entity and the subsidiary entity.

Question 20

The fact that consolidation worksheets start 'afresh' each year means that the tax entry for eliminating unrealised profit in opening inventory requires a 'Dr' to deferred tax assets,rather than income tax expense.

Question 21

Forest Ltd purchased all the issued capital of Shrub Ltd on 1 July 2013 for cash consideration of $1 million.The fair value of Shrub Ltd's net assets at that date was $1 million made up of: $$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 750000 \\\hline \text { Retained earnings } & \underline{250000} \\\hline \text { Total equity } & \underline{\$1000000} \\\hline\end{array}$$ During the period ended 30 June 2014,Shrub Ltd declare a dividend of $100 000 out of pre-acquisition earnings.What consolidation journal entries would be required to prepare group accounts for the period?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Share capital } & 750000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\\hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 750000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\\hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 750000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\\hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 100000 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Retained earnings } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend payable } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Share capital } & 750000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 250000 & \\\hline \mathrm { Cr } & \text { Investment in Shrub Ltd } & & 1000000 \\\hline\end{array}$$

Question 22

The treatment of dividends,paid by a subsidiary,that are identified as paid out of pre-acquisition profits in the period they are paid is to:

A) Capitalise the dividend in the books of the parent entity as a further investment in the subsidiary. This amount will be eliminated on consolidation.
B) Record dividend revenue and the receipt of cash in the books of the parent entity and then test the subsidiary for impairment.
C) Record a return of the investment in the subsidiary by decreasing the investment in the subsidiary in the books of the parent entity. The amount of the investment will be eliminated on consolidation.
D) Record a decrease in pre-acquisition reserves or retained profits in the books of the subsidiary so that on consolidation the elimination entry will automatically eliminate the effect of the dividend.

Question 23

Which of the following statements describes the reasons why tax adjustments may be required when eliminating the unrealised profit from intragroup sales of inventory?

A) Tax is paid on a group perspective and therefore one taxable income figure must be derived for the group.
B) Tax will be adjusted at the request of the Australian Taxation Office.
C) If tax has been paid by one of the separate legal entities, from the group's perspective this represents a deferral of the payment of tax.
D) If tax has been paid by one of the separate legal entities, from the group's perspective this represents a pre-payment of tax.

Question 24

Zeus Ltd owns 100% of the issued capital of Ares Ltd.On 1 July 2012,Zeus Ltd purchased an item of equipment from Ares Ltd for $800 000.Ares had owned the equipment for 2 years.It originally cost $890 000 and the accumulated depreciation was $178 000 at the time of sale.The equipment has been depreciated over this time,but not written down or revalued.The remaining useful life of the equipment at 1 July 2012 is estimated to be 8 years.Zeus Ltd expects the benefits to be obtained from the equipment to be evenly received over its useful life.The tax rate is 30%. What are the consolidation journal entries required for this inter-company transaction for the period ended 30 June 2014?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Opening retained earnings } & 88000 & \\\hline \mathrm { Cr } & \text { Equipment } & & 88000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 22000 & \\\hline \mathrm { Cr } & \text { Depreciation expense } & & 22000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 6600 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 6600 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Equipment } & 88000 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 88000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 25000 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 12500 \\\hline \mathrm { Cr } & \text { Depreciation expense } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 3300 & \\\hline \mathrm { Dr } & \text { Income tax expense } & 3300 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 6600 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Opening retained earnings } & 61600 & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 26400 & \\\hline \mathrm { Dr } & \text { Equipment } & 90000 & \\\hline \mathrm { Cr } & \text { Accumulated depreciation—equipment } & & 178000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 22000 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 11000 \\\hline \mathrm { Cr } & \text { Depreciation expense } & & 11000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 3300 & \\\hline \mathrm { Dr } & \text { Income tax expense } & 3300 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 6600 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Opening retained earnings } & 61600 & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 26400 & \\\hline \mathrm { Cr } & \text { Equipment } & & 88000 \\\hline\\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 22000 & \\\hline \mathrm { Cr } & \text { Depreciation expense } & &22000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 3300 & \\\hline \mathrm { Dr } & \text { Income tax expense } & 3300 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 6600 \\\hline\end{array}$$

Question 25

Belgium Ltd owns all the issued capital of Chocolate Ltd.During the period ended 30 June 2015,Belgium Ltd sold Chocolate Ltd inventory that had a cost of $200 000 for $270 000.At the end of the current period Chocolate Ltd had 75% of that inventory still on hand; the rest was sold to entities external to the group.During the previous period Chocolate Ltd had sold inventory to Belgium Ltd at a profit of $49 000.At the end of that period (30 June 2014)Belgium Ltd still had 40% of that inventory on hand.That entire inventory was sold to parties external to the group during the current year.The taxation rate is 30% and both companies use a perpetual inventory system. What consolidation journal entries are required to eliminate the effects of these transactions for the period ended 30 June 2015?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 270000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 270000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 52500 & \\\hline \mathrm { Cr } & \text { Purchases } & & 52500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 17750 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 17750 \\\hline & & & \\\hline \mathrm { Dr } & \text { Inventory } & 19600 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 19600 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 5880 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 5880 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 270000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 270000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 17500 & \\\hline \mathrm { Cr } & \text { Purchases } & & 17500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 5250 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 5250 \\\hline & & & \\\hline \mathrm { Dr } & \text { Purchases } & 29400 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 29400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 8820 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 8820 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 270000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 270000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 17500 & \\\hline \mathrm { Cr } & \text { Purchases } & & 17500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 5250 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 5250 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 49000 & \\\hline \mathrm { Cr } & \text { Closing retained earnings } & & 49000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Purchases } & 29400 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 29400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 8820 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 8820 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 270000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 270000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 52500 & \\\hline \mathrm { Cr } & \text { Inventory } & & 52500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred income tax asset } & 15750 & \\\hline \mathrm { Cr } & \text { Income tax expense } & & 15750 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 19600 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 19600 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 5880 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 5880 \\\hline\end{array}$$

Question 26

Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2015 for cash consideration of $1.5 million.The fair value of the net assets of Nail Ltd at that date was $1.2 million as follows: $$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 1000000 \\\hline \text { Retained earnings } & \underline{200000} \\\hline \text { Total equity } & \underline{\$ 1200000} \\\hline\end{array}$$ During the period ended 30 June 2016,Nail Ltd declared a dividend of $200 000 that is identified as being paid out of pre-acquisition profits and a further $100 000 is declared at the end of the period that is out of post-acquisition profits.Goodwill had been determined to have been impaired by $15 000 during the period.What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2016?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 300000 & \\\hline \mathrm { Cr } & \text { Investment in Nail Ltd } & & 1300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 15000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 15000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 200000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 200000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\\hline\end{array}$$
B)
$\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 200000 & \\\hline \mathrm{Dr} & \text { Goodwill } & 300000 & \\\hline \mathrm{Cr} & \text { Investment in Nail Ltd } & & 1520000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss-goodwill } & 15000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss-goodwill } & & 15000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend payable } & 200000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & & 200000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 200000 & \\\hline \mathrm{Cr} & \text { Dividend declared } & & 200000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend payable } & 100000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & & 100000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 100000 & \\\hline \mathrm{Cr} & \text { Dividend declared } & &100000 \\\hline\end{array}$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 100000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 400000 & \\\hline \mathrm { Cr } & \text { Investment in Nail Ltd } & & 1500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 20000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 200000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 200000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Nail Ltd } & & 1500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Goodwill impairment (expense) } & 15000 & \\\hline \mathrm { Cr } & \text { Goodwill } & & 15000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline\end{array}$$

Question 27

Large Company owns 80% of the issued capital of Smaller Company and Large Company owns 60% of the issued capital of Medium Company.The three companies form an economic entity for the purposes of consolidated accounts.During the period Smaller Company sold inventory to Medium for $400 000.Medium sold the same inventory to Large for $560 000 and Large sold it to an entity external to the group for $760 000.What are the sales revenue reported in the consolidated statements for this item?

A) $1 416 000
B) $1 720 000
C) $760 000
D) $400 000

Question 28

Companies A,B and C are all part of the one economic entity,but are all separate legal entities required to prepare their own financial statements.Company A sold Company B's inventory that cost $56 000 for $78 000.At the end of the same period Company B has three-quarters of that inventory still on hand and the rest has been sold to an entity outside the economic group.At what amount should the inventory remaining in Company B be recorded in Company B's own financial statements?

A) $42 000
B) $58 500
C) $56 000
D) $14 625

Question 29

Meat Ltd purchased 100% of the issued capital of Pie Ltd for a cash consideration of $1.7 million on 1 July 2014.At that time the fair value of the net assets of Pie Ltd were represented by: $$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 1000000 \\\hline \text { Retained earnings } & 500000 \\\hline & \$ 1500000 \\\hline\end{array}$$ Goodwill had been determined to have been impaired by $20 000 during the period.During the period ended 30 June 2015,Pie Ltd sold inventory that cost $450 000 for $620 000 to Meat Ltd.Twenty per cent of this inventory remains on hand in Meat Ltd at the end of the year.Both companies use a perpetual inventory system.The taxation rate is 30%.At the end of the period Pie Ltd declared a dividend of $45 000 that has not yet been paid.
What consolidation journal entries are required for the period ending 30 June 2015?

A)
$\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 500000 & \\\hline \mathrm{Dr} & \text { Goodwill } & 200000 & \\\hline \mathrm{Cr} & \text { Investment in Pie Ltd } & & 1700000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss } & 20000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Sales } & 620000 & \\\hline \mathrm{Cr} & \text { Cost of goods sold } & & 620000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of goods sold } & 34000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 34000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Deferred tax asset } & 10200 & \\\hline \mathrm{Cr} & \text { Income tax expense } & & 10200 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & & 45000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend payable } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend declared } & &45000 \\\hline\end{array}$
B)
$\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 455000 & \\\hline \mathrm{Dr} & \text { Goodwill } & 200000 & \\\hline \mathrm{Cr} & \text { Investment in Pie Ltd } & & 1655000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss } & 20000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Sales } & 620000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 620000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of goods sold } & 34000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 34000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Income tax expense } & 10200 & \\\hline \mathrm{Cr} & \text { Deferred tax asset } & & 10200 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & &45000 \\\hline\end{array}$
C)
$\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 500000 & \\\hline \mathrm{Dr} & \text { Goodwill } & 200000 & \\\hline \mathrm{Cr} & \text { Investment in Pie Ltd } & & 1700000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss } & 20000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Sales } & 620000 & \\\hline \mathrm{Cr} & \text { Cost of goods sold } & & 450000 \\\hline \mathrm{Cr} & \text { Unrealised profit } & & 170000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of goods sold } & 34000 & \\\hline \mathrm{Cr} & \text { Unrealised profit } & & 34000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Deferred tax liability } & 10200 & \\\hline \mathrm{Cr} & \text { Income tax asset } & & 10200 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & & 45000 \\\hline\end{array}$
D)
$\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 500000 & \\\hline \mathrm{Dr} & \text { Goodwill } & 200000 & \\\hline \mathrm{Cr} & \text { Investment in Pie Ltd } & & 1700000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss } & 20000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Sales } & 450000 & \\\hline \mathrm{Cr} & \text { Cost of goods sold } & & 450000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cost of goods sold } & 136000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 136000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Deferred tax asset } & 40800 & \\\hline \mathrm{Cr} & \text { Income tax expense } & & 40800 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend income } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend declared } & & 45000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend payable } & 45000 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & &45000 \\\hline\end{array}$

Question 30

Radio Ltd acquired all the issued capital of Wave Ltd on 1 July 2014 for cash consideration of $2 million.The fair value of the net assets of Wave Ltd at that date was $1.8 million as follows: $$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 1000000 \\\hline \text { Retained earnings } & \underline{800000} \\\hline \text { Total equity } & \underline{\$ 1800000} \\\hline\end{array}$$ During the period ending 30 June 2015,Wave Ltd declare a dividend of $300 000 that is identified as being paid out of pre-acquisition profits.Goodwill had been determined to have impaired by $20 000 during the period.What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2015?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 2000000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 250000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 250000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\\hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 800000 & \\\hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1800000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Retained earnings } & 20000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 20000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 20000 & \\\hline \mathrm { Cr } & \text { Retained earnings } & & 20000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1000000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 800000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 200000 & \\\hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 2000000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss -goodwill } & 20000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss-goodwill } & & 20000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\\hline\end{array}$$

Question 31

Little Company declared a dividend of $90 000 for the period ended 30 June 2014.Big Company owns 100% of the equity of Little Company.Big Company accrues dividends when they are declared by its subsidiaries.What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2014?

A)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Cash } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 90000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend receivable } & 90000 & \\\hline \mathrm { Cr } & \text { Cash } & & 90000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Dividend payable } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 90000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend income } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 90000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Dividend income } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend expense } & & 90000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 90000 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Dividend declared } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 90000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 90000 \\\hline\end{array}$$

Question 32

Monster Co Ltd owns 100% of the issued shares of Mini Co Ltd.Mini Co Ltd declared a dividend of $100 000 for the period ended 30 June 2014.Monster Co Ltd accrues dividends when they are declared by its subsidiaries.What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2015?

A)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Cash } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend receivable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend payable } & & 100000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Dividend declared } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend income } & & 100000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend expense } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Cash } & & 100000 \\\hline\end{array}$$
D)
$$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Dividend payable } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend declared } & & 100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend income } & 100000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & & 100000 \\\hline\end{array}$$

Question 33

Zeus Ltd owns 100% of the issued capital of Ares Ltd.On 1 July 2015,Zeus Ltd purchased an item of equipment from Ares Ltd for $800 000.Ares had owned the equipment for 2 years.It originally cost $890 000 and the accumulated depreciation was $178 000 at the time of sale.The equipment has been depreciated over this time,but not written down or revalued.The remaining useful life of the equipment at 1 July 2015 is estimated to be 8 years.Zeus Ltd expects the benefits to be obtained from the equipment to be evenly received over its useful life.The tax rate is 30%. What are the consolidation journal entries required for this inter-company transaction for the period ended 30 June 2016?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Gain on sale of equipment } & 88000 & \\\hline \mathrm { Dr } & \text { Equipment } & 90000 & \\\hline \mathrm { Cr } & \text { Accumulated depreciation—equipment } & & 178000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 26400 & \\\hline \mathrm { Cr } & \text { Income tax expense } & & 26400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 11000 & \\\hline \mathrm { Cr } & \text { Depreciation expense } & & 11000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 3300 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 3300 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Gain on sale of equipment } & 88000 & \\\hline \mathrm { Dr } & \text { Equipment } & 88000 & \\\hline \mathrm { Cr } & \text { Accumulated depreciation—equipment } & & 176000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 26400 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 26400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Accumulated depreciation } & 11000 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 11000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 3300 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 3300 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 270000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 270000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 17500 & \\\hline \mathrm { Cr } & \text { Purchases } & & 17500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 5250 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 5250 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 49000 & \\\hline \mathrm { Cr } & \text { Closing retained earnings } & & 49000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Purchases } & 29400 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 29400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 8820 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 8820 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Gain on sale of equipment } & 88000 & \\\hline \mathrm { Cr } & \text { Equipment } & & 88000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 26400 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 26400 \\\hline & & & \\\hline \mathrm { Dr } & \text { Depreciation expense } & 12500 & \\\hline \mathrm { Cr } & \text { Accumulated depreciation } & & 12500 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 3750 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 3750 \\\hline\end{array}$$

Question 34

Apple Ltd owns all the issued capital of Pear Ltd.On 1 July 2014,Pear Ltd purchased an item of plant from Apple Ltd for $1 000 000.Apple Ltd had owned the plant for 5 years.It originally cost $1 350 000 and the accumulated depreciation at 1 July 2004 is $562 500.The remaining useful life of the equipment on the date of sale to Pear Ltd is estimated to be 7 years.The pattern of benefits is expected to be obtained from the equipment evenly over its useful life.The tax rate is 30%.Round all calculations to the nearest dollar. What are the consolidation journal entries required for this inter-company transaction for the periods ended 30 June 2015 and 30 June 2016?

A)

B)

C)
$\text { Period ended } 30 \text { June 2015: }\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & {\text { Gain on sale }} &212500 & \\\hline \mathrm{Cr} & \text { Plant } & &212500 \\\hline & & & \\\hline \mathrm{Dr} & \text { Accumulated depreciation - plant } &80357 & \\\hline \mathrm{Cr} & \text { Depreciation expense } & & 80357 \\\hline & & & \\\hline \mathrm{Dr} & \text { Income tax expense } & 24107 & \\\hline \mathrm{Cr} & \text { Deferred tax asset } & &24107 \\\hline\\\hline\end{array}$
$\begin{array}{l}\text { Period ended } 30 \text { June 2016: }\\\begin{array}{|c|l|r|r|}\hline & & & \\\hline \mathrm{Dr} & \text { Opening retained earnings } & 148750 & \\\hline \mathrm{Cr} & \text { Plant } & & 148750 \\\hline & & & \\\hline \mathrm{Dr} & \text { Accumulated depreciation - plant } & 80357 & \\\hline \mathrm{Cr} & \text { Depreciation expense } & & 80357 \\\hline & & & \\\hline \mathrm{Dr} & \text { Income tax expense } & 24107 & \\\hline \mathrm{Cr} & \text { Deferred tax asset } & & 24107 \\\hline\end{array}\end{array}$
D)

Question 35

French Ltd purchased 100% of the issued capital of Pastry Ltd for a cash consideration of $2.1 million on 1 July 2015.At that time the fair value of the net assets of Pastry Ltd were represented by: $$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 1700000 \\\hline \text { Retained earnings } & 300000 \\\hline & \$ 2000000 \\\hline\end{array}$$ Goodwill had been determined to have been impaired by $5000 during the period.During the period ended 30 June 2016 Pastry Ltd sold inventory that cost $190 000 for $300 000 to French Ltd.Sixty per cent of this inventory remains on hand in French Ltd at the end of the year.Both companies use a perpetual inventory system.The taxation rate is 30%.
What consolidation journal entries are required for the period ending 30 June 2016?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1700000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 300000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 95000 & \\\hline \mathrm { Cr } & \text { Investment in Pastry Ltd } & & 2095000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 190000 \\\hline \mathrm { Cr } & \text { Unrealised profit } & & 110000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 66000 & \\\hline \mathrm { Cr } & \text { Unrealised profit } & & 66000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 19800 & \\\hline \mathrm { Cr } & \text { Deferred tax asset } & & 19800 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1700000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 300000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 100000 & \\\hline \mathrm { Cr } & \text { Investment in Pastry Ltd } & & 2100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 44000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 44000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 13200 & \\\hline \mathrm { Cr } & \text { Income tax expense } & & 13200 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1700000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 300000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 100000 & \\\hline \mathrm { Cr } & \text { Investment in Pastry Ltd } & & 2100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 5000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 5000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 66000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 66000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 19800 & \\\hline \mathrm { Cr } & \text { Income tax expense } & & 19800 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 1700000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 300000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 100000 & \\\hline \mathrm { Cr } & \text { Investment in Pastry Ltd } & & 2100000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 5000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 5000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Purchases } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Cost of goods sold } & 44000 & \\\hline \mathrm { Cr } & \text { Purchases } & & 44000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Deferred tax asset } & 13200 & \\\hline \mathrm { Cr } & \text { Income tax expense } & & 13200 \\\hline\end{array}$$

Question 36

French Ltd owns 100% of the issued capital of Pastry Ltd.During the period ended 30 June 2014,Pastry Ltd sold inventory that cost $190 000 for $300 000 to French Ltd.Sixty per cent of this inventory remains on hand in French Ltd at the end of that year.Both companies use a perpetual inventory system.The taxation rate is 30%. What consolidation journal entries are required in relation to the inter-company transaction for the period ending 30 June 2015?

A)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Closing retained earnings } & 44000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 44000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 13200 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 13200 \\\hline\end{array}$$
B)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Opening retained earnings } & 66000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 66000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 19800 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 19800 \\\hline\end{array}$$
C)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 66000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 66000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 19800 & \\\hline \mathrm { Cr } & \text { Deferred income tax asset } & & 19800 \\\hline\end{array}$$
D)
$$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Sales } & 300000 & \\\hline \mathrm { Cr } & \text { Cost of goods sold } & & 300000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Opening retained earnings } & 44000 & \\\hline \mathrm { Cr } & \text { Inventory } & & 44000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Income tax expense } & 13200 & \\\hline \mathrm { Cr } & \text { Opening retained earnings } & & 13200 \\\hline\end{array}$$

Question 37

Dividends paid between entities in the group should be:

A) not permitted by the ultimate controlling entity because it does not make sense to exchange money between entities in the one economic group.
B) reflected in the group accounts because it reflects the economic return the group earned by investing in the companies that form its operations.
C) eliminated from the group accounts, but reflected in the individual legal entity accounts, since the group accounts reflect the many entities as one single economic entity.
D) retained in the consolidated statements but disclosed separately as related-party transactions.

Question 38

What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Barker Limited is the parent of Corbett Limited? (Ignore the tax effect.)
Barker purchases 500 units of inventory for $20 each.Barker sells this entire inventory to Corbett at a mark-up of 50%.At the end of the period,100 units are on hand.

A) $1000
B) $2000
C) $3000
D) $5000

Question 39

Stormy Ltd has purchased all the issued capital of Cloud Ltd at the beginning of the current period.At the end of the period Cloud Ltd declares a dividend of $50 000 that is identified as being paid out of pre-acquisition profits.What entries would Stormy Ltd and Cloud Ltd make in their own books? (Assume Stormy Ltd accrues the dividends of subsidiaries when they are declared.)

A)
$\begin{array}{l}\text { Stormy Ltd. }\\\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Dividend receivable } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend income } & & 50000 \\\hline & & & \\\hline\end{array}\end{array}$
$\begin{array}{l}\text { Cloud Ltd }\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Dividend declared } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend payable } & & 50000 \\\hline\end{array}\end{array}$
B)
$\begin{array}{l}\text { Stormy Ltd }\\\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Dividend receivable } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend income } & & 50000 \\\hline & & & \\\hline\end{array}\end{array}$
$\begin{array}{l}\text { Cloud Ltd }\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Pre-acquisition retained earnings } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend payable } & & 50000 \\\hline\end{array}\end{array}$
C)
$\begin{array}{l}\text { Stormy Ltd }\\\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Investment in Cloud Ltd } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend income } & & 50000 \\\hline & & & \\\hline\end{array}\end{array}$
$\begin{array}{l}\text { Cloud Ltd }\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Pre-acquisition retained earnings } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend payable } & & 50000 \\\hline\end{array}\end{array}$
D)
$\begin{array}{l}\text { Stormy Ltd }\\\begin{array}{|c|l|r|r|}\hline \text { Dr } & \text { Dividend receivable } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend income } & & 50000 \\\hline & & & \\\hline\end{array}\end{array}$
$\begin{array}{l}\text { Cloud Ltd }\\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Dividend declared } & 50000 & \\\hline \mathrm{Cr} & \text { Dividend payable } & & 50000 \\\hline\end{array}\end{array}$

Question 40

Companies A,B and C are all part of the one economic entity,but are all separate legal entities required to prepare their own financial statements.Company A sold Company B inventory that cost $56 000 for $78 000.At the end of the same period Company B has three-quarters of that inventory still on hand and the rest has been sold to an entity outside the economic group.At what amount should the inventory remaining in Company B be recorded in the consolidated statements?

A) $14 625
B) $56 000
C) $58 500
D) $42 000

Question 41

The journal entries to eliminate unrealised profit in closing inventory at 30 June 2014 were as follows: $$\begin{array} { | l | r | r | } \hline 30 \text { June } 2014 & & \\\hline \text { Dr Cost of goods sold } & 50000 & \\\hline \text { Cr Inventory } & & 50000 \\\hline & & \\\hline \text { Dr Deferred tax asset } & 15000 & \\\hline \text { Cr Income tax expense } & & 15000 \\\hline\end{array}$$ What are the journal entries to eliminate the unrealised profits in opening inventory the following period?

A)
$$\begin{array} { | l | r | r | } \hline \text { 1 July } 2014 & & \\\hline \text { Dr Cost of goods sold } & 50000 & \\\hline \text { Cr Inventory } & & 50000 \\\hline & & \\\hline \text { Dr Deferred tax asset } & 15000 & \\\hline \text { Cr Income tax expense } & & 15000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | r | r | } \hline \text { 1 July } 2014 & & \\\hline \text { Dr Opening retained earnings (1 July 2014) } & 50000 & \\\hline \text { Cr Cost of goods sold } & & 50000 \\\hline & & \\\hline \text { Dr Deferred tax asset } & 15000 & \\\hline \text { Cr Opening retained earnings (1 July 2014) } & & 15000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | r | r | } \hline \text { 1 July } 2014 & & \\\hline \text { Dr Opening retained earnings (1 July 2014) } & 50000 & \\\hline \text { Cr Inventory } & & 50000 \\\hline & & \\\hline \text { Dr Deferred tax asset } & 15000 & \\\hline \text { Dr Opening retained earnings (1 July 2014) } & & 15000 \\\hline\end{array}$$
D)
$$\begin{array} { | l | r | r | } \hline \text { 1 July } 2014 & & \\\hline \text { Dr Opening retained earnings (1 July 2014) } & 50000 & \\\hline \text { Cr Cost of goods sold } & & 50000 \\\hline & & \\\hline \text { Dr Income tax expense } & 15000 & \\\hline \text { Cr Opening retained earnings (1 July 2014) } & & 15000 \\\hline\end{array}$$

Question 42

Detail at least five types of intragroup transactions that require elimination adjustments to be made in the consolidated accounts

Question 43

Explain,with examples,the difference between dividend payments out of pre-acquisition profits and dividend payments out of post-acquisition profits,and the manner in which they are accounted for in consolidation accounting.

Question 44

Alice Ltd sold inventory items to its subsidiary Mad Hatter Ltd and had the following intercompany transactions:
Cost of inventory $100 000 sold for $125 000 for the year ended 30 June 2012.Half of the inventory items were sold by Mad Hatter Ltd to external parties before the financial year end 30 June 2012.
Cost of inventory $75 000 sold for $100 000 for the year ended 30 June 2013.Half of the inventory items were sold by Mad Hatter Ltd to external parties before the financial year end 30 June 2013.
Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013?

A) Consolidated sales will decrease by $125 000.
B) Consolidated sales will increase by $25 000.
C) Consolidated profit will decrease by $12 500.
D) There will be no change in the consolidated profit.

Question 45

Aladdin Ltd sells inventory for a profit to its subsidiary Jasmine Ltd to be used as machinery in Jasmine Ltd's production process.The consolidation worksheet of Aladdin Ltd with respect to this transaction only should ­not include:

A) a debit to sales.
B) a credit to cost of sales.
C) a credit to inventories.
D) a credit to machinery.

Question 46

A non-current asset was sold by Subsidiary Limited to Parent Limited on 30 June 2014.The carrying amount of the asset at the time of the sale was $700 000.As part of the consolidation process,the following journal entry was passed. $$\begin{array} { | l | r | r | } \hline 30 \text { June } 2014 & & \\\hline \text { Dr Profit on sale of asset } & 200000 & \\\hline \text { Dr Asset } & 300000 & \\\hline \text { Cr Accumulated depreciation } & & 500000 \\\hline & & \\\hline \text { Dr Deferred tax asset } & 60000 & \\\hline \text { Cr Income tax expense } & & 60000 \\\hline\end{array}$$ Assuming there is another ten years of useful life remaining for the asset,what are the journal entries at 30 June 2016 to adjust for depreciation?

A)
$$\begin{array} { | l | r | r | } \hline 30 \text { June } 2016 & & \\\hline \text { Dr Accumulated depreciation } & 40000 & \\\hline \text { Cr Depreciation } & & 40000 \\\hline & & \\\hline \text { Dr Income tax expense } & 12000 & \\\hline \text { Cr Deferred tax asset } & & 12000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | r | r | } \hline 30 \text { June } 2016 & & \\\hline \text { Dr Accumulated depreciation } & 30000 & \\\hline \text { Cr Depreciation } & & 30000 \\\hline & & \\\hline \text { Dr Income tax expense } & 9000 & \\\hline \text { Cr Deferred tax asset } & & 9000 \\\hline\end{array}$$
C)
$\begin{array}{|l|r|r|}\hline 30 \text { June } 2016 & & \\\hline \text { Dr Accumulated depreciation } & 60000 & \\\hline \text { Cr Depreciation } & & 30000 \\\hline \text { Cr Opening retained earnings (1 July 2016) } & & 30000 \\\hline & & \\\hline \text { Dr Opening retained earnings (1 July 2016) } & 9000 & \\\hline \text { Dr Income tax expense } & 9000 & \\\hline \text { Cr Deferred tax asset } & & 18000\\\hline\end{array}$
D)
$$\begin{array} { | l | r | r | } \hline 30 \text { June 2016 } & & \\\hline \text { Dr Accumulated depreciation } & 40000 & \\\hline \text { Cr Depreciation } & & 20000 \\\hline \text { Cr Opening retained earnings (1 July 2016) } & & 20000 \\\hline & & \\\hline \text { Dr Opening retained earnings (1 July 2016) } & 6000 & \\\hline \text { Dr Income tax expense } & 6000 & \\\hline \text { Cr Deferred tax asset } & & 12000 \\\hline\end{array}$$

Question 47

Explain the accounting treatment for impairment to the subsidiary investment when dividends have been paid out of pre-acquisition profits.

Question 48

Tookey Ltd sold inventory items (with a cost of $75 000)to its subsidiary Milky Ltd for $135 000.A third of the inventory items were sold by Milky Ltd to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

A) Consolidated sales will decrease by $75 000.
B) Consolidated sales will decrease by $95 000.
C) Consolidated profit will decrease by $60 000.
D) Consolidated profit will decrease by $40 000.

Question 49

Explain,with examples and the assumptions made,why it is necessary to pass consolidation journal entries to adjust for unrealised profits existing in opening inventory.

Question 50

Woody Ltd sold inventory items to its subsidiary Buzz Lightyear Ltd and had the following intercompany transactions:
Cost of inventory $300 000 sold for $375 000 for the year ended 30 June 2012.One third of the inventory items were sold by Buzz Lightyear Ltd to external parties before the financial year end 30 June 2012.
Cost of inventory $100 000 sold for $75 000 for the year ended 30 June 2013.Half of the inventory items were sold by Buzz Lightyear Ltd to external parties before the financial year end 30 June 2013.
Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013

A) Consolidated sales will decrease by $100 000.
B) Consolidated sales will increase by $275 000.
C) Consolidated profit will increase by $62 500.
D) Consolidated profit will increase by $12 000.

Question 51

Blue Ltd sold inventory items (with a cost of $90 000)to its subsidiary Maroon Ltd for $120 000.Half of the inventory items were sold by Maroon Ltd to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

A) Consolidated sales will decrease by $60 000.
B) Consolidated sales will decrease by $100 000.
C) Consolidated profit will decrease by $15 000.
D) Consolidated profit will decrease by $20 000.

Question 52

Explain why unrealised profits and losses between entities within a group are eliminated on consolidation.Discuss when these transactions are realised for consolidated statement purposes.

Question 53

A non-current asset was sold by Subsidiary Limited to Parent Limited during the 2013/14 financial year.The carrying amount of the asset at the time of the sale was $1 400 000.As part of the consolidation process,the following journal entry was passed. $\begin{array}{|l|r|l|}\hline 30 \text { June } 2014 & & \\\hline \text { Dr Profit on sale of asset } & 400000 & \\\hline \text { Dr Asset } & 600000 & \\\hline \text { Cr Accumulated depreciation } & & 1000000 \\\hline\end{array}$ What (a)amount did Parent Limited pay Subsidiary Limited for the asset; (b)was the cost of the asset as shown in the books of Subsidiary Limited?

A) (a) $1 800 000; (b) $1 400 000
B) (a) $1 800 000; (b) $1 600 000
C) (a) $1 400 000; (b) $2 400 000
D) (a) $1 800 000; (b) $2 400 000

Question 54

Lilo Ltd sells inventory items to its subsidiary Stitch Ltd.If during the financial year 2013,the unrealised profits in ending inventory in Stitch Ltd exceeds that of its unrealised profits in beginning inventory,which of the following statements is correct with respect to Lilo Ltd's consolidated financial statements after considering these transactions only?

A) Consolidated profit will decrease.
B) Consolidated deferred tax liability will increase.
C) Consolidated ending inventory will decrease.
D) Consolidated sales will be unaffected.

Question 55

Explain why gains recognised on sale of assets between entities within a group are reversed on consolidation.

Question 56

Penny Ltd sells inventory items to its subsidiary Bolt Ltd.If during the financial year 2013,the unrealised profits in ending inventory in Bolt Ltd is less than its unrealised profits in beginning inventory,which of the following statements is correct with respect to Penny Ltd's consolidated financial statements after considering these transactions only?

A) Consolidated profit will increase.
B) Consolidated deferred tax liability will increase.
C) Consolidated ending inventory will decrease.
D) Consolidated sales will be unaffected.

Question 57

What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Limited is the parent of Wise Limited? (Ignore the tax effect.)
Morecombe purchases 500 units of inventory for $20 each.Morecombe sells this entire inventory to Wise at a mark up of 25%.Wise then sells half of the inventory to an external party.Half of the remaining amount (after the external sale)is sold back to Morecombe for $2500.

A) cannot determine from the information given
B) $300
C) $625
D) $1250

Question 58

A non-current asset was sold by Subsidiary Limited to Parent Limited during the 2013/14 financial year.The carrying amount of the asset at the time of the sale was $700 000.As part of the consolidation process,the following journal entry was passed. $\begin{array}{|l|r|r|}\hline 30 \text { June } 2014 & & \\\hline \text { Dr Profit on sale of asset } & 200000 & \\\hline \text { Dr Asset } & 300000 & \\\hline \text { Cr Accumulated depreciation } & & 500000 \\\hline\end{array}$ What (a)amount did Parent Limited pay Subsidiary Limited for the asset; (b)was the cost of the asset as shown in the books of Subsidiary Limited?

A) (a) $900 000; (b) $1 400 000
B) (a) $900 000; (b) $1 200 000
C) (a) $700 000; (b) $1 200 000
D) (a) $900 000; (b) $800 000

Question 59

Discuss the reasoning behind the elimination all dividends receivable/payable between entities within the group during the consolidation process.

Question 60

Aladdin Ltd sold inventory items (with a cost of $100 000)to its subsidiary Genie Ltd for $120 000.Half of the inventory items were sold by Genie Ltd to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?

A) Consolidated sales will decrease by $60 000.
B) Consolidated sales will decrease by $100 000.
C) Consolidated profit will decrease by $10 000.
D) Consolidated profit will decrease by $20 000.