Question 1

When a depreciable non-current asset is sold between entities within a group,any gain recognised on the sale is eliminated and realised through future use of the asset by the group.

Accepted Answer

This statement relates to the accounting treatment for intra-group sales of depreciable non-current assets under the rules of International Financial Reporting Standards (IFRS). According to IFRS, any gain or loss on such sales is eliminated on consolidation of the group's financial statements, and the gain is only realised through future use of the asset by the group. This is known as the 'group relief' or 'group synergies' approach, which recognises that the asset is still within the group and its value will be unlocked over time as the group uses the asset for its intended purpose. Therefore, the statement is true.

Question 2

The elimination of the full effects of intragroup transactions is required in the preparation of consolidated financial statements.

Accepted Answer

In order to avoid double-counting, the effects of intragroup transactions must be eliminated in the preparation of consolidated financial statements, as these transactions involve entities within the same group and do not represent external transactions.

Question 3

The effect of an intragroup sale of inventory in a prior period,where the inventory is still on hand at the end of the prior period but is sold in the current period,is that a credit adjustment is made to income tax expense in the subsequent period.

Accepted Answer

The answer of The effect of an intragroup sale of...

Question 4

The effect of an intragroup sale of inventory at a profit,where the inventory has been sold to external parties prior to the end of the reporting period,is that both profit and the inventory asset are overstated.

Accepted Answer

An intragroup sale of inventory means that the sale is between companies within the same group. In such a case, the profit is eliminated in consolidation and is not recognized in the group's consolidated financial statements, thus, it doesn't lead to overstating the profit. The inventory asset can be overstated if it's not eliminated from the group's consolidated financial statements, but this would depend on the circumstances of the particular transaction. Therefore, the statement in the question is only partially correct and the correct answer is B (False).

Question 5

On 16 May 2014,Zebra Ltd sold equipment to its subsidiary Nando Ltd for $100 000,this asset having a carrying amount at time of sale of $80 000.The equipment was regarded by Zebra Ltd as a depreciable non-current asset,being depreciated at 10% p.a.on cost,whereas Nando Ltd records the machinery as inventory.The asset was sold by Nando Ltd before 30 June 2014.The worksheet entry for the year ended 30 June 2014 would include which of the following adjustments?

Accepted Answer

The answer of On 16 May 2014,Zebra Ltd sold equipment...

Question 6

When an entity sells a non-current asset at a profit to another entity within the same group,which of the following adjustments is necessary on consolidation?

Accepted Answer

When a non-current asset is sold at a profit within the same group, a gain on sale is recognized. The journal entry to record this transaction would be to debit gain on sale and credit the asset account. Hence, on consolidation, an adjustment is needed to recognize the gain on sale by debiting gain on sale and crediting the asset account.

Question 7

The effect of an intragroup sale of inventory in a prior period,where the inventory is still on hand at the end of the current period,is that a credit adjustment is made to inventory in the current period.

Accepted Answer

When an intragroup sale of inventory occurs in a prior period and the inventory is still on hand at the end of the current period, a credit adjustment is made to inventory in the current period to reflect the transfer within the group. This ensures that the financial statements accurately reflect the true value of the inventory on hand.

Question 8

When a depreciable non-current asset is sold between entities within a group,any gain recognised on the sale is eliminated and realised through the future use of the asset by the group.This results in reduced depreciation and income tax expenses in future periods.

Accepted Answer

The gain recognised on the sale is eliminated in the consolidation process to avoid overstating the group's profits, but this does not result in reduced depreciation and income tax expenses in future periods. The asset's carrying amount and depreciation are adjusted for consolidation purposes, but this does not directly affect the group's future income tax expenses as these are based on the group's consolidated taxable income.

Question 9

Where an intragroup sale of an asset has been made and the asset was classified as inventory in the selling entity's books,but subsequently classified as plant in the buying entity's books,all depreciation recognised in the buying entity's books must be eliminated on consolidation.

Accepted Answer

In consolidation, only the unrealized profit on the intragroup sale needs to be eliminated, not the depreciation recognized by the buying entity.

Question 10

Which of the following items is an example of an intragroup service?

Accepted Answer

An intragroup service refers to a transaction between entities within the same group that involves the provision of a service. Option D is the only item that describes a service, which is renting a building from one entity to another within the same group. Options A, B, and C, all pertain to transfers of assets or inventory, which are not considered intragroup services.

Question 11

If an entity sells a non-current asset at a profit to another entity within the same group,which of the following consolidation adjustments is necessary to reflect the tax effect?

Accepted Answer

The answer of If an entity sells a non-current asset...

Question 12

When a depreciable non-current asset is sold between entities within a group,any gain recognised on the sale is eliminated and realised through consolidation adjustments which result in increased depreciation expenses in future periods.

Accepted Answer

The answer of When a depreciable non-current asset is sold...

Question 13

If an interim dividend is paid by a subsidiary to its parent,the consolidation entry to eliminate the transaction is which of the following?

Accepted Answer

The entry should credit the interim dividend as it is an inflow of economic resources and debit the dividend revenue account of the parent since it is a reduction of the subsidiary's equity. Option A and D are incorrect because they do not reflect the accounting treatment of the transaction. Option C is incorrect because it suggests the creation of a dividend payable account, which is not necessary in this case.

Question 14

During the year ended 30 June 2017,a parent entity rents a warehouse from a subsidiary entity for $200 000.The company tax rate is 30%.Which of the following is the consolidation adjustment entry needed at reporting date to eliminate the transaction?

Accepted Answer

The answer of During the year ended 30 June 2017,a...

Question 15

The effect of an intragroup sale of inventory in a prior period,where the inventory is still on hand at the end of that prior period,is that a debit consolidation adjustment is made to opening retained earnings.

Accepted Answer

An intragroup sale of inventory in a prior period means that one entity within a group of companies sold inventory to another entity within the same group in a previous period. If the inventory is still on hand at the end of that prior period, a consolidation adjustment is required to ensure that the financial statements of the group are presented fairly. This adjustment involves debiting opening retained earnings by the amount of profit that was eliminated as a result of the intragroup sale.

Question 16

Where an intragroup sale of an asset at a profit has been made and the asset was classified as plant in the selling entity's books,but subsequently classified as inventory in the buying entity's books,a credit adjustment is required against cost of sales in the year of sale.

Accepted Answer

When an intragroup sale of an asset at a profit has been made and the asset was classified as plant in the selling entity's books, but subsequently classified as inventory in the buying entity's books, a credit adjustment is required against cost of sales in the year of sale. This adjustment is required to ensure that the profit is only recognized once, and is properly allocated between the two entities.

Question 17

The effect of an intragroup sale of inventory at a profit where the inventory is still on hand at the end of the reporting period is that both profit and the inventory asset are overstated.

Accepted Answer

An intragroup sale of inventory at a profit means that one entity within a group of companies is selling inventory to another entity within the same group at a higher price than its cost. This results in an inflated profit for the group as a whole, as well as an overstatement of the value of inventory remaining on hand at the end of the reporting period, since it has been recorded at the inflated sale price.

Question 18

Where there is an intragroup sale of inventory and the inventory has been sold to external parties prior to the end of the reporting period,no adjustment is required on consolidation.

Accepted Answer

When there is an intragroup sale of inventory and the inventory has been sold to external parties prior to the end of the reporting period, an adjustment is required on consolidation to eliminate the effect of the transaction. This is because the sale between the group entities should be eliminated to reflect the consolidated financial position of the group. Therefore, option B is the correct answer.

Question 19

A consolidation worksheet adjustment to eliminate the effect of interest revenue and interest expense relating to intragroup loans has which of the following tax effects?

Accepted Answer

The consolidation worksheet adjustment to eliminate the effect of interest revenue and interest expense relating to intragroup loans is a purely accounting entry that does not affect the tax base of the assets or liabilities. Therefore, it has no tax effect.

Question 20

When a non-depreciable non-current asset such as land is sold between entities within a group,the adjustment in relation to any gain or loss recognised on the transfer is carried forward until the asset is disposed of to an external party.

Accepted Answer

This statement is true. When a non-depreciable non-current asset such as land is sold between entities within a group, any gain or loss recognised on the transfer is not realised until the asset is disposed of to an external party. Therefore, the adjustment is carried forward until this occurs.

Quiz 20: Consolidation: Intragroup Transactions