Deck 28: Consolidation: Intragroup Transactions

Question 1

A parent entity group sold a depreciable non-current asset to a subsidiary entity for $5 300. The asset originally cost $7 000 when acquired from an external party and at the date of the intragroup sale the accumulated depreciation was $2 200. The amount of the unrealised gain on the intragroup sale to be eliminated is:

A) $500.
B) $2 200.
C) $4 800.
D) $5 300.

Answer 1

A

Question 2

The profit on an intragroup business transaction is 'realised' when:

A) the parent sells to the subsidiary.
B) the subsidiary sells to the parent.
C) there is involvement with an external party.
D) only entities within the group are parties to the transaction.

Answer 2

C

Question 3

During the year ended 30 June 2022, a subsidiary entity sold inventories to a parent entity for $50 000. The inventories had previously cost the subsidiary entity $45 000. By 30 June 2022 the parent entity had sold 75% of the inventories to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 2023 is:

A) $$\begin{array} { l l c r } \text { Sales reverue } & \mathrm { Dr } & 50000 \\\text { Cost of sales } & \mathrm { Cr } & & 48750 \\\text { Irventories } & \mathrm { Cr } & & 1250 \\\text { Deferred tax asset } & \mathrm { Dr } & 375 & \\\text { Income tax expense } & \mathrm { Cr } & & 375\end{array}$$
B) $$\begin{array} { l l l } \text { Retained earnings } & \mathrm { Dr } & 3500 \\\text { Income tax expense } & \mathrm { Dr } & 1500 \\\text { Cost of sales } & \mathrm { Cr } &5000\end{array}$$
C) $$\begin{array} { l l l } \text { Retained earrings } & \mathrm { Dr } & 875 \\\text { Incorne tax expense } & \mathrm { Dr } & 375 \\\text { Cost of sales } & \mathrm { Cr } &1250\end{array}$$
D) $$\begin{array} { c l c c } \text { Retained earnings } & \mathrm { Dr } & 1250 \\\text { Irventories } & \mathrm { Cr } & 1250 \\\text { Deferred tax asset } & \mathrm { Dr } & 375 \\\text { Retained earnings } & \mathrm { Cr } & 375\end{array}$$

Answer 3

$$\begin{array} { l l l } \text { Retained earrings } & \mathrm { Dr } & 875 \\\text { Incorne tax expense } & \mathrm { Dr } & 375 \\\text { Cost of sales } & \mathrm { Cr } &1250\end{array}$$

Question 4

The tax effect of eliminating the unrealised profit from an intragroup sale of inventories and adjusting the value of the inventories on hand is recognised as:

A) an increase in income tax expense.
B) an increase in deferred tax liability.
C) a decrease in deferred tax liability.
D) an increase in deferred tax asset.

Question 5

During the current period, Ambrose Limited sold inventories to its parent entity at a profit of $12 000. The inventories cost Ambrose Limited $36 000. At balance sheet date the parent had sold 50% of the inventories to an external party. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to:

A) $1 000.
B) $18 000.
C) $6 000.
D) $36 000.

Question 6

Key questions to consider when determining the appropriate consolidation adjustment entries include the following except for:

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

Question 7

Which of the following statements is incorrect?

A) Adjustments are required for both prior period and current period intragroup transactions to the extent that the effects of those transactions are still present in the individual accounts of the entities involved.
B) The profits or losses generated from intragroup transfers of assets are considered realised from the group's perspective until such movement when those assets are transferred to external entities.
C) Adjustments are determined by comparing the amounts recognised in the individual accounts affected with the amounts that the group should recognise.
D) When adjustments for intragroup transactions affect the carrying amount of assets or liabilities, further adjustments are made for the tax effect of those adjustments.

Question 8

Which of the following statements is incorrect?

A) the effects of intragroup transactions need to be eliminated in full.
B) the effects of intragroup transactions that need to be eliminated are those related to the current profit.
C) the adjustments for the elimination of the effects of intragroup transactions may need to be repeated in subsequent periods.
D) the effects of intragroup transactions are recognised in the individual statements of financial position and/or the individual statements of comprehensive income.

Question 9

Sherrin Ltd purchased goods from its subsidiary for $24 000. The goods cost the subsidiary $18 000. The company rate of tax is 30%. Which of the following consolidation adjustment entries is correct?

A) DR Income tax expense $1 800 CR Deferred tax liability $1 800.
B) DR Income tax expense $1 800 CR Deferred tax asset $1 800.
C) DR Deferred tax asset $1 800 CR Income tax expense $1 800.
D) DR Deferred tax liability $1 800 CR Income tax expense $1 800.

Question 10

During the current period, a subsidiary entity sold inventories to its parent entity at a profit of $6 000. The goods had originally cost the subsidiary $14 000. At the end of the year all the inventories were still on hand. The adjustment entry to deal with this transaction on consolidation would include the following line item:

A) CR Cost of sales $14 000.
B) CR Cost of sales $20 000.
C) CR Cost of sales $6 000.
D) CR Cost of sales $8 000.

Question 11

Purple Ltd sold an item of plant to its subsidiary, Rain Ltd, on 1 January 2022 for $50 000. The asset had cost Purple Ltd $60 000 and had an useful life of 6 years when acquired on 1 January 2020 from an external party. The adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2022 will result in:

A) an increase in current year profit.
B) a decrease in current year profit.
C) an increase in current year profit and non-current assets.
D) a decrease in current year profit and non-current assets.

Question 12

During the year ended 30 June 2022, a subsidiary entity sold inventories to a parent entity for $50 000. The inventories had previously cost the subsidiary entity $45 000. By 30 June 2022 the parent entity had sold all the inventories to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 2023 is:

A) $\begin{array}{llr}\text { Sales revenue }&\mathrm{Dr}&50,000\\\text { Cost of sales } & \mathrm{Cr} && 45,000 \\\text { Inventories } & \mathrm{Cr} && 5,000\\\text { Deferred tax asset }&\mathrm{Dr}&1,500\\\text { Income tax expense }& \mathrm{Cr}&&1,500\\\end{array}$
B) $\begin{array}{lll}\text { Retained earnings } & \text { Dr } & 3500 \\\text { Income tax expense } & \mathrm{Dr} & 1500 \\\text { Cost of sales } & \mathrm{Cr} &5000\end{array}$
C) $$\begin{array} { c l c c } \text { Retained earriirigs } & \mathrm { Dr } & 5000 \\\text { Irventories } & \mathrm { Cr } & & 5000 \\\text { Deferted tax asset } & \mathrm { Dr } & 1500 & \\\text { Retained earriirgs } & \mathrm { Cr } & & 1500\end{array}$$
D) No entry is required

Question 13

A subsidiary sold inventories to its parent entity in the year ended 30 June 2022 at a profit of $8 000. At 30 June 2022 the parent had not sold the inventories. The company tax rate is 30%. The consolidation worksheet prepared at 30 June 2022 will contain the following adjustment entry for inventories:

A) CR Inventories $2 400.
B) DR Inventories $2 400.
C) DR Inventories $8 000.
D) CR Inventories $8 000.

Question 14

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

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

Question 15

The adjustments included in the consolidation worksheet are:
I. pre-acquisition entries
II. business combination valuation entries
III. elimination of the effects of intragroup transactions

A) I, II and III
B) I and II only
C) I only
D) II only

Question 16

On 5 June 2022, a parent entity sold inventories to a subsidiary entity for $80 000. The inventories had previously cost the parent entity $72 000. All the inventories are still held by the subsidiary at reporting date, 30 June 2022. Ignoring tax effects, the adjustment entry in the consolidation worksheet at reporting date is:

A) $$\begin{array} { l l l l } \text { Cash } & \mathrm { Dr } & 72,000 & \\\quad \text { Sales reverue } & \mathrm { Cr } & & 72,000 \\\text { Cost of sales } & \mathrm { Dr } & 72,000 & \\\text { Irventories } & \mathrm { Cr } & & 72,000\end{array}$$
B) $$\begin{array} { l l l l } \text { Sales reverule } & \mathrm { Dr } & 72000 \\\text { Cash } & \mathrm { Cr } & & 72000\\\text { Irvertories } & \mathrm { Dr } & 72000 & \\\text { Cost of sales } & \mathrm { Cr } & &72000\end{array}$$
C) $\begin{array}{ccr}\text { Sales revenue } & \mathrm{Dr} \quad 80,000 & \\\text { Cost of sales } & \mathrm{Cr} & 8,000 \\\text { Inventories } & \mathrm{Cr} & 72,000\end{array}$
Inventories
D) $\begin{array}{ccc}\text { Sales revenue } & \mathrm{Dr} \quad 80,000 & \\\text { Cost of sales } & \mathrm{Cr} & 72,000 \\\text { Inventories } & \mathrm{Cr} & 8000\end{array}$

Question 17

During the current period, a subsidiary entity sold inventories to a parent entity for $40 000. The inventories had previously cost the subsidiary entity $36 000. By reporting date the parent entity had sold 75% of inventories to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at reporting date is:

A) $\begin{array}{cccc}\text { Sales revenue } & \mathrm{Dr} & 40,000 & \\\text { Cost of sales } & \mathrm{Cr} & &36,000 \\\text { Inventories } & \mathrm{Cr} & &4,000 \\\text { Deferred tax asset } & \mathrm{Dr} & 1,200 & \\\text { Income tax expense } & \mathrm{Cr} & &1,200 \end{array}$
B) $\begin{array}{ccrr}\text { Sales revenue } & \mathrm{Dr} & 40000 & \\\text { Cost of sales } & \mathrm{Cr} & & 39000 \\\text { Inventories } & \mathrm{Cr} & &1000 \\\text { Deferred tax asset } & \mathrm{Dr} & 300 & \\\text { Income tax expense } & \mathrm{Cr} & & 300\end{array}$
C) $$\begin{array} { l l r r } \text { Sales reverue } & \mathrm { Dr } & 30000 \\\text { Cost of sales } & \mathrm { Cr } & & 27000 \\\text { Irventories } & \mathrm { Cr } & & 3000 \\\text { Deferred tax asset } & \mathrm { Dr } & 900 & \\\text { Income tax expense } & \mathrm { Cr } & & 900\end{array}$$
D) $$\begin{array} { c l c c } \text { Sales reverue } & \mathrm { Dr } & 10000 \\\text { Cost of sales } & \mathrm { Cr } & & 9000 \\\text { Irventories } & \mathrm { Cr } & & 1000 \\\text { Deferred tax asset } & \mathrm { Dr } & 300 & \\\text { Income tax expense } & \mathrm { Cr } & & 300\end{array}$$

Question 18

During the current period, a subsidiary entity sold inventories to its parent entity at a profit of $6 000. The goods had originally cost the subsidiary $30 000. All the inventories were still on hand at the end of the year. The consolidation adjustment entry would include the following line item:

A) CR Inventories $30 000.
B) CR Inventories $24 000.
C) CR Inventories $18 000.
D) CR Inventories $6 000.

Question 19

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

A) DR Asset CR Cash
B) DR Gain on sale CR Asset
C) DR Cash CR Asset
D) DR Asset CR Gain on sale.

Question 20

Which of the following statements is incorrect?

A) consolidated profit arises only in relation to transactions with entities external to the group.
B) consolidated revenues are earned only from transactions with entities external to the group.
C) consolidated assets are recorded at the cost to the legal entity that owns them.
D) consolidated liabilities are obligations to entities external to the group.

Question 21

Which of the following statements is incorrect?

A) Where the transferred assets are depreciable, adjustments are made to depreciation accounts (for the current period depreciation) and/or to the retained earnings account (for the previous periods' depreciation).
B) Adjustments for the gain/loss on intragroup sale of property, plant and equipment are made in all periods after the sale.
C) As depreciation reflects the use of the asset by the group, the depreciation adjustments are realising a part of the gain/loss on the intragroup sale of property, plant and equipment.
D) As the intragroup sale of property, plant and equipment impacts on the profit and the carrying amount of assets, adjustments for the tax effects are also required.

Question 22

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

Question 23

During the year ended 30 June 2022, Jasmine Ltd rents a warehouse from its subsidiary, Rose Ltd, for $20 000. The company tax rate is 30%. The consolidation adjustment entry needed at 30 June 2022 is:

A) $$\begin{array} { c l c c } \text { Rent reverule } & \mathrm { Dr } & 20000 & \\\text { Rent expense } & \mathrm { Cr } & & 20000 \\\text { Income tax expense } & \mathrm { Dr } & 6000 & \\\text { Deferted tax liability } & \mathrm { Cr } & & 6000\end{array}$$
B) $$\begin{array} { c l c c } \text { Rent reverule } & \mathrm { Dr } & 20000 & \\\text { Rent expense } & \mathrm { Cr } & & 20000 \\\text { Deferred tax asset } & \mathrm { Dr } & 6000 & \\\text { Income tax expense } & \mathrm { Cr } & & 6000\end{array}$$
C) Rent Teverume $\quad$ Dr $\quad$$\quad$ 20000
Rent experse $\quad$$\quad$ Cr $\quad$$\quad$ 20000
D) Rent expense $\quad$ Dr $\quad$$\quad$ 20000
Rent revenue $\quad$$\quad$ Cr $\quad$$\quad$ 20000

Question 24

Kateri Ltd sold an item of plant to its subsidiary, Patrick Ltd, on 1 January 2022 for $50 000. The asset had cost A Ltd $60 000 and had a useful life of 6 years when acquired on 1 January 2020 from an external party. The adjustment necessary on consolidation to reflect the tax effect of the depreciation adjustment for the year ended 30 June 2022 will result in an increase in:

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

Question 25

Paul Limited provided an advance of $150 000 to its subsidiary Caitlin Limited. On consolidation, the following adjustment is needed in relation to this intragroup advance:

A) no adjustment is needed.
B) DR Advances to Caitlin Ltd $150 000 CR Advances from Paul Ltd $150 000
C) DR Advances from Paul Ltd $150 000 CR Advances to Caitlin Ltd $150 000
D) DR Advances from Paul Ltd $150 000 CR Cash $150 000

Question 26

On 1 July 2021, Zoe Ltd sold equipment to its subsidiary, Nate Ltd, for $80 000. The equipment had a carrying amount at the time of sale of $70 000. The equipment was depreciated by Zoe Ltd at 10% p.a. on cost, while Nate Ltd applies a rate of 8%. The consolidation worksheet entry for the year ended 30 June 2022 would include the following adjustment in relation to depreciation:

A) DR Depreciation expense $1 000 CR Accumulated depreciation $1 000
B) DR Accumulated depreciation $1 000 CR Depreciation expense $1 000
C) DR Depreciation expense $800 CR Accumulated depreciation $800
D) DR Accumulated depreciation $800 CR Depreciation expense $800

Question 27

On 1 January 2021, Gemma Ltd sells inventories to its subsidiary, Tess Ltd, for $24 000. The inventories cost Gemma Ltd $20 000 earlier in the current year. Tess Ltd intends to use the item as plant with a useful life of 10 years. The estimated salvage value of the plant is zero and the straight-line method of depreciation will be applied. The tax rate is 30%. The worksheet entry for the year ended 30 June 2021 would include the following adjustment:

A) DR Plant $4 000.
B) CR Plant $4 000.
C) DR Inventories $4 000.
D) CR Inventories $4 000.

Question 28

Changes in accounting standards since 2008 require all dividends:

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

Question 29

When eliminating an intragroup service, which of the following entries would appear in the consolidation worksheet entry?

A) CR Income tax expense.
B) CR Deferred tax liability.
C) DR Services expense.
D) DR Services revenue.

Question 30

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

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

Question 31

During the current period, Rosina Limited paid an interim dividend of $60 000 to its parent entity, Anastasia Limited. If the tax rate is 30%, what would be the adjustment made in the consolidation entry to record the tax effect of this transaction at the end of the period?

A) DR Deferred Tax Asset $18 000.
B) DR Income Tax Expense $18 000.
C) CR Deferred Tax Liability $18 000.
D) There is no tax effect entry required.

Question 32

Rachel Ltd provided an advance of $100 000 to its subsidiary Marion Ltd. Interest of $10 000 was charged during the year ended 30 June 2021. On consolidation, the following adjustment is needed at 30 June 2021 in relation to the interest charged:

A) no adjustment needed.
B) DR Interest expense $10 000 CR Interest revenue $10 000
C) DR Retained earnings $10 000 CR Cash $10 000
D) DR Interest revenue $10 000 CR Interest expense $10 000

Question 33

The consolidation adjustments in relation to intragroup borrowings:

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

Question 34

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

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

Question 35

With regards to services provided within the group:

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

Question 36

On 1 July 2021, Xavier Ltd rents a warehouse for one year from its subsidiary, Gabrielle Ltd, for $60 000. The company tax rate is 30%. The consolidation adjustment entry needed at 30 June 2023 is:

A) $$\begin{array} { c l c c } \text { Profit ard loss surninary } & \text { DR } & 60000 & \\\text { Retained earnings } & \text { CR } & & 60000 \\\text { Income tax expense } & \text { DR } & 18000 & \\\text { Deferted tax liability } & \text { CR } & & 18000\end{array}$$
B) $$\begin{array} { c l c c } \text { Profit ard loss surrinary } & \text { DR } & 60000 & \\\text { Retained earnings } & \text { CR } & & 60000 \\\text { Deferred tax asset } & \text { DR } & 18000 & \\\text { Income tax expense } & \text { CR } & & 18000\end{array}$$
C) Profit and loss surrimary $\quad$$\mathrm { DR }$$\quad$ 60000
Retained earmings $\quad$$\mathrm { CR }$$\quad$ 60000
D) No entry is required at 30 June 2023.

Question 37

Kateri Ltd sold an item of plant to its subsidiary, Patrick Ltd, on 1 January 2022 for $50 000. The asset had cost A Ltd $60 000 and had a useful life of 6 years when acquired on 1 January 2020 from an external party. The adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2023 will result in:

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

Question 38

Margaret Company made an advance of $45 000 to its subsidiary, Jack Limited. Margaret Company charges interest of $15 000 on this advance. The consolidation adjustment to eliminate the advance is:

A) DR Interest revenue $60 000 CR Interest expense $60 000
B) DR Advance from Margaret Co. $45 000 CR Advance to Jack Ltd $45 000
C) DR Interest expense $60 000 CR Interest revenue $60 000
D) DR Advance to Jack Ltd $45 000 CR Advance from Margaret Co. $45 000

Question 39

A dividend paid out of profits earned after the acquisition date is known as a:

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

Question 40

Which of the following statements is incorrect?

A) Profits/losses on intragroup services are immediately realised to the group.
B) It is necessary to have a tax-effect adjustment when adjusting for intragroup services.
C) Adjustments for previous periods' intragroup services affect only statement of financial position accounts, but only if the fees have not been paid.
D) Adjustments for current period intragroup services affect statement of profit or loss and other comprehensive income accounts and statement of financial position accounts if the fees have not been paid and only statement of profit or loss and other comprehensive income accounts otherwise.