Zeus Ltd owns 100 per cent of the issued capital of Ares Ltd. On 1 July 2005 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 2005 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 per cent.
What are the consolidation journal entries required for this inter-company transaction for the period ended 30 June 2007?
E) None of the given answers.

Question

Quizplus · Accepted Answer

When there is an inter-company transaction, it needs to be eliminated to avoid the double-counting of the transaction.

In this case, Zeus Ltd (parent) purchased an item of equipment from Ares Ltd (subsidiary). Since Zeus owns 100% of Ares, this is an example of an intragroup transaction.

The entries that need to be made in this case are:
1. Eliminate the intercompany transaction (sale of equipment) at cost:
- Dr Equipment (Asset) $800,000
- Cr Equipment (Liability) $800,000

2. Eliminate the accumulated depreciation at cost:
- Dr Accumulated Depreciation (Liability) $178,000
- Cr Depreciation Expense (Expense) $178,000

3. Adjust the depreciation expense based on remaining useful life:
- Dr Depreciation Expense (Expense) $47,500
- Cr Accumulated Depreciation (Liability) $47,500

Note that the tax implications of this transaction are not relevant for consolidation purposes, so no entries need to be made for tax.

Therefore, the correct answer is choice B.

Zeus Ltd Owns 100 Per Cent of the Issued Capital