Question 1

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

Accepted Answer

An intragroup sale of inventories at a profit would result in the profit being overstated, but the inventories asset would not be affected since they have already been sold to external parties.

Question 2

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

Accepted Answer

When an intragroup sale of inventories occurs in a prior period and the inventories are still on hand at the end of that prior period, a debit consolidation adjustment is made to opening retained earnings to eliminate the unrealized profit on the inventories. This adjustment ensures that the consolidated financial statements reflect the true economic reality of the group's financial position and performance.

Question 3

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? $\begin{array}{llll}
\text { Rent revenue } & \mathrm{Dr} & 200000 \
\text { Rent expense } & \mathrm{Cr} &&200000
\end{array}$

$\begin{array}{llll}
\text { Rent revenue } & \mathrm{Dr} & 200000 & \
\text { Rent expense } & \mathrm{Cr} & & 200000 \
\text { Income tax expense } & \mathrm{Dr} & 60000 & \
\text { Deferred tax liability } & \mathrm{Cr} & & 60000
\end{array}$

$\begin{array}{llrr}
\text { Rent revenue } & \mathrm{Dr} & 200000 & \
\text { Rent expense } & \mathrm{Cr} & &200000 \
\text { Deferred tax asset } & \mathrm{Dr} & 600000 & \
\text { Income tax expense } & \mathrm{Cr} & & 60000
\end{array}$

$\begin{array}{l}
\text { Rent expense }&& \mathrm{Dr} &200000&\
\text { Rent revenue }&&\text { Dr } &&200000
\end{array}$

Accepted Answer

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

Question 4

A parent entity sold a depreciable non-current asset to a subsidiary entity for $5600. The asset originally cost $6000 and at the date of sale accumulated depreciation was $1000. The amount of the unrealised gain on sale to be eliminated is:

Accepted Answer

The unrealised gain on sale is the difference between the carrying amount of the asset and the sale price. The carrying amount of the asset is the original cost minus accumulated depreciation, which is $6000 - $1000 = $5000. The sale price is $5600. Therefore, the unrealised gain on sale is $5600 - $5000 = $600.

Question 5

The effect of an intragroup sale of inventories 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 effect of an intragroup sale of inventories 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, typically requires an adjustment to eliminate unrealized profit and adjust the cost of goods sold, rather than directly adjusting income tax expense. The tax effect would be indirect, as the elimination of unrealized profit affects pre-tax income, which in turn could affect the income tax expense.

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. Therefore, on consolidation, this gain needs to be eliminated to avoid double counting. The adjustment required would be to debit the gain on sale and credit the asset sold.

Question 7

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 8

The effect of an intragroup sale of inventories in a prior period, where the inventories are 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 inventories are sold from one subsidiary to another within the same group in a prior period, the sale is eliminated in the consolidation process and the inventories are still on hand at the end of the current period. To reflect the lower cost of inventories resulting from the intragroup sale, a credit adjustment is made to inventory in the current period. Therefore, the statement is true.

Question 9

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

Accepted Answer

The answer of Where there is an intragroup sale of...

Question 10

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 consolidation entry to eliminate the transaction of an interim dividend paid by a subsidiary to its parent would be to debit the Dividend revenue account and credit the Interim dividend paid account. This is because the parent company would record the dividend revenue in their own books, and the subsidiary would reduce its assets by paying out the dividend. Option A is incorrect because the company does not record an expense for an interim dividend paid. Option C is incorrect because a dividend payable would be recorded if the dividend had been declared but not yet paid, which is not the case here. Option D is incorrect because it only records the payment of the dividend, but does not eliminate the transaction in the consolidation process.

Question 11

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 according to accounting standards. The gain or loss on transfer of a non-depreciable non-current asset within a group is not recognised immediately but is carried forward until the asset is disposed of to an external party, at which point the adjustment is recognised in the income statement.

Question 12

On 16 May 2017, 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 2017. The worksheet entry for the year ended 30 June 2017 would include which of the following adjustments?

Accepted Answer

Since Nando Ltd records the equipment as inventory, the sale of the equipment would be recorded as a credit to inventory and a debit to cost of sales for the carrying amount of $80,000. Therefore, the correct adjustment would be to credit cost of sales for $20,000 (i.e. $100,000 sale price - $80,000 carrying amount) and debit inventory for $20,000. The entries would be as follows:
Dr Inventory $20,000
Cr Cost of sales $20,000

Question 13

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 is true according to accounting standards. 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. This is because the asset is still within the group and its original cost basis is used to calculate its depreciation over its useful life. Therefore, any gain on the sale is deferred and realised over time as the asset is used by the group.

Question 14

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

Accepted Answer

Intragroup sales at a profit where the inventories are still on hand at the end of the reporting period result in an overstatement of profit because the profit recognized on the sale within the group does not represent a real profit to the group as a whole until the inventory is sold to an external party. Similarly, the inventory asset is overstated because it includes the unrealized profit margin.

Question 15

Unite Ltd provided a loan of $1 000 000 to its subsidiary Inspire Ltd. Interest of $100 000 was charged during the year ended 30 June 2018. On consolidation, which of the following adjustments is needed at 30 June 2018 in relation to the interest charged?

Accepted Answer

When Unite Ltd provides a loan to its subsidiary, it earns interest revenue, while Inspire Ltd incurs interest expense. These two accounts should be eliminated upon consolidation. Therefore, an adjustment is needed to eliminate the effect of interest revenue and interest expense in the consolidated financial statements. 
In this case, Unite Ltd earned interest revenue of $100 000, which will be eliminated by a debit to interest revenue and a credit to interest expense. Therefore, the correct entry is:
Dr Interest revenue $100 000
Cr Interest expense $100 000

Question 16

Chancellor Limited provided a loan of $1 500 000 to its subsidiary Park Limited. On consolidation, which of the following adjustments is needed in relation to this intragroup loan?

Accepted Answer

The consolidation process involves eliminating any intercompany transactions and balances to avoid double counting. In this case, Chancellor Limited provided a loan to its subsidiary Park Limited, which creates an intercompany balance. The correct adjustment is to eliminate this balance by recording a loan payable from Park Limited to Chancellor Limited and a corresponding loan receivable from subsidiaries in the consolidated financial statements. Option C accurately reflects this adjustment. Option B is incorrect because it incorrectly records a loan payable to Park Limited rather than from it. Option D is incorrect because it records a cash entry, which is not required since the loan was not repaid. Option A is incorrect because an adjustment is necessary to reflect the intercompany loan.

Question 17

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

Accepted Answer

Intragroup transactions occur between entities within the same group and can distort the financial statements if not eliminated. Therefore, the full effects of intragroup transactions must be eliminated in the preparation of consolidated financial statements to provide accurate and meaningful information about the group's financial position and performance.

Question 18

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

Accepted Answer

An intragroup service refers to a transaction between two entities within the same group where one entity provides a service to the other. The rental of a building from one entity to another entity within the group is an example of an intragroup service. The other options (A, B, and C) involve the buying or selling of assets between entities within the group, which is not considered an intragroup service.

Question 19

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

When a non-current asset is sold at a profit within the same group, a deferred tax asset is recognized because the profit is eliminated in consolidation, creating a temporary difference that will reverse in the future.

Question 20

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.

Quiz 11: Consolidation: Intragroup Transactions