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:

Accepted Answer

The unrealised gain is calculated as the difference between the sale price ($5,300) and the carrying amount of the asset at the time of sale. The carrying amount is the original cost ($7,000) minus accumulated depreciation ($2,200), which equals $4,800. The difference between the sale price and the carrying amount is $5,300 - $4,800 = $500. This represents the unrealised gain that needs to be eliminated in the consolidation process.

Question 2

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

Accepted Answer

The profit on an intragroup business transaction is not considered as "realised" until there is involvement with an external party who is not part of the group. This is because intragroup transactions do not involve external market forces, and thus, there is no assurance that the prices or terms of such a transaction are reflective of market prices. Only when an external party becomes involved is there a market price, and thus, a "realised" profit can be determined. Therefore, options A, B, and D are incorrect.

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:

Accepted Answer

The correct adjustment involves eliminating the unrealized profit on the unsold inventory within the group. Since 75% of the inventory was sold outside the group, 25% remains, carrying an unrealized profit of $5,000 * 25% = $1,250. This profit needs to be eliminated from the consolidated financial statements. The tax effect of this intra-group profit ($1,250 * 30%) is $375, which reduces the income tax expense.

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:

Accepted Answer

The elimination of unrealised profit from intragroup sales reduces taxable income in the future when the inventory is sold to an external party, creating a deductible temporary difference and resulting in 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:

Accepted Answer

Since the parent entity sold only 50% of the inventories to an external party, the remaining 50% still holds the unrealized profit. The unrealized profit is calculated as $12,000 (total profit) * 50% (unsold inventory) = $6,000. This amount needs to be eliminated in the consolidation process to avoid overstating profits and assets.

Question 6

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

Accepted Answer

The other three questions (tax effect, recorded amounts, and timing) are all important considerations when determining consolidation adjustments. However, whether the transaction involves the parent entity selling assets to the subsidiary or the subsidiary selling assets to the parent entity does not necessarily affect the appropriateness of the consolidation adjustment entries. The key is to ensure that the financial statements of the consolidated entity reflect the economic substance of the business transactions between the related parties.

Question 7

Which of the following statements is incorrect?

Accepted Answer

The profits or losses generated from intragroup transfers of assets are not considered realised from the group's perspective until those assets are transferred to external entities. Therefore, statement B is incorrect.

Question 8

Which of the following statements is incorrect?

Accepted Answer

The statement that the effects of intragroup transactions that need to be eliminated are those related to the current profit is incorrect. Intragroup transactions that need to be eliminated include all assets, liabilities, income, and expenses, not just those related to current profit.

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?

Accepted Answer

The answer of Sherrin Ltd purchased goods from its subsidiary...

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:

Accepted Answer

The subsidiary sold the inventories to the parent at a profit of $6,000, so the cost of sales for the subsidiary would be $14,000 + $6,000 = $20,000. However, since the inventories are still on hand at the end of the year, the cost of sales for the consolidated entity would only be $14,000. Therefore, the adjustment entry would include a credit to cost of sales for $14,000.

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:

Accepted Answer

When an asset is sold from a parent company to its subsidiary, it is considered an intercompany transaction. In the case of Purple Ltd and Rain Ltd, Purple Ltd sold an item of plant to its subsidiary, Rain Ltd, for $50,000. However, in Purple Ltd's books, the item of plant was recorded at a cost of $60,000 on 1 January 2020.

Assuming that both companies have the same year-end of 31 December, the adjustment necessary on consolidation in relation to the transfer of plant as at 30 June 2022 will result in a decrease in profit and non-current assets. This is because on consolidation, the item of plant will be eliminated from Purple Ltd's books and added to Rain Ltd's books at its original cost of $60,000. As such, there will be a loss of $10,000 ($60,000 - $50,000) on the transfer of the item of plant from Purple Ltd to Rain Ltd. This loss will be recognized as a decrease in the consolidated profit and a decrease in non-current assets.

Therefore, the correct answer is 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:

Accepted Answer

Since the inventories were sold to an external party by the parent entity by the end of the financial year, there is no unrealized profit to eliminate, and thus no adjustment entry is required in the consolidation worksheet.

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:

Accepted Answer

The answer of A subsidiary sold inventories to its parent...

Question 14

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

Accepted Answer

AASB 10 requires that the effects of intragroup transactions be eliminated in full on consolidation to prevent double counting and to ensure that the consolidated financial statements present the financial position and results of the group as a single economic entity.

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

Accepted Answer

The consolidation worksheet includes all three adjustments, pre-acquisition entries, business combination valuation entries, and the elimination of the effects of intragroup transactions. Pre-acquisition entries adjust for any differences between the book value and the fair value of the subsidiary's assets and liabilities before the acquisition. Business combination valuation entries adjust for any goodwill or bargain purchase gains resulting from the acquisition. The elimination of the effects of intragroup transactions removes any transactions between the parent and the subsidiary, ensuring that only transactions with external parties are included in the consolidated financial statements.

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:

Accepted Answer

In consolidation, intercompany transactions are eliminated. The parent's sale to the subsidiary is not recognized in consolidated financial statements. The $8,000 profit ($80,000 sale price - $72,000 cost) included in the subsidiary's inventory value must be eliminated. This is done by debiting Sales Revenue to remove the sale and crediting Inventories to reduce the inventory value on the consolidated balance sheet by the unrealized profit.

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:

Accepted Answer

The answer of During the current period, a subsidiary entity...

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:

Accepted Answer

When a subsidiary sells goods to its parent entity, any profit made on the sale must be eliminated from the consolidated financial statements to prevent double counting. In this case, the subsidiary made a profit of $6 000 on the sale of inventories to its parent. Therefore, the consolidation adjustment would involve crediting the Inventories account by $6 000 to eliminate the profit. The cost of the inventories ($30 000) is not relevant to this adjustment.

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:

Accepted Answer

When a non-depreciable non-current asset is sold at a profit to another entity within the same group, the gain on sale must be eliminated on consolidation to avoid double counting. Therefore, the entry on consolidation should be to debit the Gain on Sale account (which appears on the selling entity's income statement) and credit the Asset account (which represents the non-current asset being sold). This is reflected in choice B, which is the correct answer. The other options either do not reflect the elimination of the gain on sale or are not applicable to this situation.

Question 20

Which of the following statements is incorrect?

Accepted Answer

Consolidated assets are recorded at fair value, not at the cost to the legal entity that owns them.

Quiz 28: Consolidation: Intragroup Transactions

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

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:

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

Which of the following statements is incorrect?

Which of the following statements is incorrect?

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?

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

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

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:

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:

Which of the following statements is incorrect?