Deck 4: Intra-Group Transactions

Question 1

P Ltd lends $200 000 to its subsidiary S Ltd.At the end of the year,S Ltd has paid interest of $18 000 and owes a further $2000 (assume a tax rate of 30%).The required consolidation entry is:

A) $\begin{array} { l l } \text { Dr. Loan Payable } & \$ 200,000 \\\text { Cr. Loan Receivable } & \$ 200,000\end{array}$
B) $\begin{array} { l l } \text { Dr. Loan Payable } & \$ 200,000 \\\text { Cr. Loan Receivable } & \$ 200,000 \\\text { Dr. Interest Revenue } & \$ 20,000 \\\text { Cr. Interest Payable } & \$ 20,000\end{array}$
C) $\begin{array} { l c } \text { Dr. Loan Payable } & \$ 200,000 \\\text { Cr. Loan Receivable } & \$ 200,000 \\\text { Dr. Interest Revenue } & \$ 20,000 \\\text { Cr. Interest Expense } & \$ 20,000 \\\text { Dr. Accrued Interest Payable } \$ 2000 & \\\text { Cr. Accrued Interest Receivable } \$ 2000\end{array}$
D) $\begin{array}{l}\text { Entry } \mathrm { C } \text { plus: }\\\begin{array} { l l } \text { Dr. Deferred Tax Asset } & \$ 600 \\\text { Cr. Income Tax expense } & \$ 600 \\\text { Dr. Income Tax expense } & \$ 600 \\\text { Cr. Deferred Tax Liability } & \$ 600\end{array}\end{array}$

Answer 1

$\begin{array}{l}\text { Entry } \mathrm { C } \text { plus: }\\\begin{array} { l l } \text { Dr. Deferred Tax Asset } & \$ 600 \\\text { Cr. Income Tax expense } & \$ 600 \\\text { Dr. Income Tax expense } & \$ 600 \\\text { Cr. Deferred Tax Liability } & \$ 600\end{array}\end{array}$

Question 2

A loss on intragroup 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.

Answer 2

True

Question 3

Using the same data as for Question 9,what would be the consolidation entry required for the next financial year (assuming S sold all the inventory during the next year)?

A) $\begin{array} { l l } \text { Dr. Sales } & \$ 20,000 \\\text { Cr. Cost of Sales } & \$ 20,000\end{array}$
B) Dr. Opening Retained Earnings $\quad\$ 20,000$
Cr. Cost of Goods Sold $\quad\quad \$ 20,000$
C) as for $B$ plus
Dr. Income Tax Expense $\$ 6000$
Cr. Retained Earnings $\quad \$ 6000$
D) None of the above

Answer 3

as for $B$ plus
Dr. Income Tax Expense $\$ 6000$
Cr. Retained Earnings $\quad \$ 6000$

Question 4

Consolidation entries never adjust cash because intragroup transactions do not alter the group's cash position.

Question 5

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

Question 6

A Ltd sells inventory to its parent P Ltd for $60 000 representing a mark-up of 50% on cost.At year-end,3/4 of the goods are still held by P Ltd.The unrealised profit to be eliminated on consolidation is:

A) $20 000.
B) $15 000.
C) $30 000.
D) $10 000.

Question 7

Which of the following accounts cannot be altered by a consolidation adjusting entry?

A) Income tax expense
B) Income tax payable
C) Deferred tax asset
D) Deferred tax asset

Question 8

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

Question 9

A consolidation adjustment will have a tax effect if:

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 10

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,which of the following consolidation entries are required?

A) $\begin{array} { l l } \text { Dr. Sales } & \$ 80,000 \\\text { Cr. Cost of Sales } & \$ 80,000\end{array}$
B) $\begin{array} { l c } \text { Dr. Sales } & \$ 80,000 \\\text { Cr. Cost of Sales } & \$ 80,000 \\\text { Dr. Closing Inventory } & \$ 20,000 \\\text { Cr. Inventory } & \$ 20,000\end{array}$
C)As for $B$ plus
Dr. Deferred Tax Asset $\$ 6000$
Cr. Income Tax expense $\$ 6000$
D) None of the above

Question 11

Where service fees are accrued by group members,there is no tax effect on consolidation.

Question 12

Explain why cash will never be adjusted in consolidation journal entries.

Question 13

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:

A) Dr. Management Fee Revenue $\quad\quad\$ 100,000$
Cr. Management Fee Expense $\quad\quad\$ 100,000$
B) Dr. Management Fee Revenue $\quad\quad\$ 100,000$
Cr. Management Fee Expense $\quad\quad \$ 100,000$
Dr. Accrued Fees Payable $\quad\quad\quad\quad\$ 20,000$
Cr. Accrued Fees Receivable $\quad\quad\quad \$ 20,000$
C) Dr. Management Fees Revenue $\quad\quad\$ 80,000$
Cr. Management Fees Expense $\quad\quad\$ 80,000$
D) none of the above

Question 14

Dividends paid by the parent company and all subsidiaries will be eliminated as consolidation adjustments.

Question 15

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

Question 16

Deferred tax assets and liabilities arising from accrual of intragroup interest on loans should be offset as a consolidation adjustment.

Question 17

Where a parent entity sells inventories to a subsidiary,this is called an 'upstream' sale.

Question 18

Unrealised profits on an intragroup sale of inventories arise if:

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 19

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:

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

Question 20

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

A) $75 000.
B) $100 000.
C) $25 000.
D) not eliminated.

Question 21

When a depreciable asset is sold at a profit on an intragroup basis,a consolidation entry is required to recognise a deferred tax asset.

Question 22

An impairment loss will be recognised in the group accounts when non-current assets are sold at a loss on an intragroup basis when value in use is:

A) greater than carrying amount.
B) less than carrying amount.
C) greater than sale price.
D) less than sale price.

Question 23

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 three 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) $20 000.
B) $4000.
C) $3200.
D) $0.

Question 24

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

Question 25

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

A) $\begin{array} { l r } \text { Dr. Opening Retained Earnings } & \$ 900,000 \\\text { Cr. Gain on Sale } & \$ 900,000\end{array}$
B) $\begin{array} { l r } \text { Dr. Opening Retained Earnings } & \$ 1,100,000 \\\text { Cr. Gain on Sale } & \$ 1,100,000\end{array}$
C) $\begin{array} { l r } \text { Dr. Opening Retained Earnings } & \$ 200,000 \\\text { Cr. Gain on Sale } & \$ 200,000\end{array}$
D)no entry required

Question 26

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

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 27

Unrealised gains on the intragroup sale of depreciable assets are realised via depreciation charges over the remaining useful life of the asset.

Question 28

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

Question 29

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

Question 30

In a periodic inventory system,cost of goods sold is the account credited when there is unrealised profit in closing inventories from a previous year.

Question 31

Unrealised profits on the intragroup sale of inventory will only be eliminated on consolidation in the year in which they arise.

Question 32

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

Question 33

P Ltd acquired inventories for $150 000,which were sold to its subsidiary S Ltd for $120 000 (assume a tax rate of 30%).On consolidation,a deferred tax liability would be recorded for:

A) $45 000.
B) $36 000.
C) $9000.
D) not recorded.

Question 34

S Ltd acquired land from its parent company P Ltd for $1 000 000.The land had originally cost P Ltd $100 000 (assume a tax rate of 30%).On consolidation,the deferred tax asset will be recorded at:

A) $300 000.
B) $30 000.
C) $270 000.
D) not recorded.

Question 35

Current accounting regulations require the separate disclosures in profit or loss of gains and losses on disposal of non-current assets.

Question 36

Using the same facts as Question 14 but assuming that S will depreciate the asset over its remaining estimated useful life of eight years,what is the depreciation expense adjustment required on consolidation one year after the intragroup sale?

A) Cr. $400
B) Dr. $400
C) Cr. $2100
D) Cr. $2500

Question 37

A loss arising from an intragroup transfer of inventories can be regarded as an unrealised loss that will be recovered by the group in a sale to an outside party.

Question 38

The useful life of a depreciable asset cannot change subsequent to an intragroup sale of the asset.