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    Answers T10 Tutorial Question 10 - CHP 11

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    Shiv Achari
    Adjustments must be made to intragroup transactions in consolidated financial statements as these internal transactions do not reflect dealings with external parties. When a subsidiary sells a depreciable asset to the parent, the cost to the group differs from the subsidiary's recorded cost. Therefore, depreciation expense and accumulated depreciation must be adjusted based on the group's cost. Similarly, if a profit is made on an intragroup sale of a depreciable asset, adjustments are needed to reduce depreciation amounts in relation to the asset.

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    Answers T10 Tutorial Question 10 - CHP 11

    Uploaded by

    Shiv Achari
    233 views14 pages
    Adjustments must be made to intragroup transactions in consolidated financial statements as these internal transactions do not reflect dealings with external parties. When a subsidiary sells a depreciable asset to the parent, the cost to the group differs from the subsidiary's recorded cost. Therefore, depreciation expense and accumulated depreciation must be adjusted based on the group's cost. Similarly, if a profit is made on an intragroup sale of a depreciable asset, adjustments are needed to reduce depreciation amounts in relation to the asset.

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    Answers T10 Tutorial question 10_Chp 11

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    Adjustments must be made to intragroup transactions in consolidated financial statements as these internal transactions do not reflect dealings with external parties. When a subsidiary sells a depreciable asset to the parent, the cost to the group differs from the subsidiary's recorded cost. Therefore, depreciation expense and accumulated depreciation must be adjusted based on the group's cost. Similarly, if a profit is made on an intragroup sale of a depreciable asset, adjustments are needed to reduce depreciation amounts in relation to the asset.

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    233 views14 pages

    Answers T10 Tutorial Question 10 - CHP 11

    Uploaded by

    Shiv Achari
    Adjustments must be made to intragroup transactions in consolidated financial statements as these internal transactions do not reflect dealings with external parties. When a subsidiary sells a depreciable asset to the parent, the cost to the group differs from the subsidiary's recorded cost. Therefore, depreciation expense and accumulated depreciation must be adjusted based on the group's cost. Similarly, if a profit is made on an intragroup sale of a depreciable asset, adjustments are needed to reduce depreciation amounts in relation to the asset.

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    of 14

    Chapter 11: Consolidated financial statements: intragroup transactions

    Review questions

    1. Why is it necessary to make adjustments for intragroup transactions? (LO1)

    The consolidated financial statements are the statements of the group, an economic entity
    consisting of the parent and its subsidiaries.
    The consolidated financial statements then can only contain profits, assets and liabilities that
    relate to parties external to the group.
    Adjustments must then be made for intragroup transactions as these are internal to the economic
    entity, and do not reflect the effects of transactions with external parties.
    This is also consistent with the entity concept of consolidation, which defines the group as the
    net assets of the parent and the net assets of the subsidiary. Transactions between these parties
    must then be adjusted in full as both parties are within the economic entity

    4. Where an intragroup transaction involves a depreciable asset, why is depreciation


    expense adjusted? (LO3)

    The cost of the asset to the group is different from that recorded by the acquirer of the
    depreciable
    asset within an intragroup transaction. The acquirer records depreciation on the
    cost to the
    acquirer while in the consolidated financial statements, the group wants to show depreciation
    calculated on cost to the group. Hence an adjustment is necessary.
    If a profit is made on an intragroup sale of a depreciable asset, then the cost of the asset to the
    group is less than the cost recorded by the acquirer of the asset. Hence an adjustment is necessary
    to reduce the depreciation expense and accumulated depreciation in relation to the asset

    Question 11.3

    Intragroup transactions

    Dingo Ltd owns all of the shares of Bilby Ltd. In relation to the following intragroup
    transactions, all parts of which are independent unless specified, prepare the consolidation
    worksheet adjusting entries for preparation of the consolidated financial statements as at
    30 June 2019. Assume an income tax rate of 30%.

    (a) On 1 January 2018, Dingo Ltd sold inventory costing $6000 to Bilby Ltd at a transfer
    price of $8000. On 1 September 2018, Bilby Ltd sold half these items of inventory back
    to Dingo Ltd, receiving $3000 from Dingo Ltd. Of the remaining inventory kept by
    Bilby Ltd, half was sold in January 2019 to Goanna Ltd at a loss of $200.
    (b) On 1 January 2019, Bilby Ltd sold an item of plant to Dingo Ltd for $2000.
    Immediately before the sale, Bilby Ltd had the item of plant on its accounts for $3000.
    Bilby Ltd depreciated items at 5% p.a. on the diminishing balance and Dingo Ltd used
    the straight-line method over 10 years.
    (c) On 1 July 2018, Dingo Ltd sold a motor vehicle to Bilby Ltd for $12 000. This had a
    carrying amount to Dingo Ltd of $9600. Both entities depreciate motor vehicles at a
    rate of 10% p.a. on cost.
    (d) During the 2017–18 period, Dingo Ltd sold inventory to Bilby Ltd for $9000, recording
    a before-tax profit of $1800. Half this inventory was unsold by Bilby Ltd at 30 June
    2018.
    (e) Bilby Ltd sells second-hand machinery. Dingo Ltd sold one of its depreciable assets
    (original cost $80 000, accumulated depreciation $64 000) to Bilby Ltd for $10 000 on 1
    January 2019. Bilby Ltd had not resold the item by 30 June 2019.
    (f) On 1 May 2019, Bilby Ltd sold inventory costing $300 to Dingo Ltd for $360 on credit.
    On 30 June 2019, only half of these goods had been sold by Dingo Ltd, but Dingo Ltd
    had paid $280 back to Bilby Ltd.
    (LO2 and LO3)
    Question 11.6

    Consolidated worksheet entries, rationale for adjustments

    Tasmanian Ltd owns all the issued shares of Tiger Ltd, having acquired its ownership
    interest on 1 August 2013. The accountant, Ms Echidna, is preparing the consolidated
    financial statements at 30 June 2019, and, as a part of preparing the consolidation
    worksheet for Tasmanian Ltd, is analysing the intragroup transactions between the parent
    and its subsidiary.

    The intragroup transactions under analysis are as follows (assume a tax rate of 30%).

    (a) On 1 February 2019, Tiger Ltd sold inventory to Tasmanian Ltd for $15 000, recording
    a before-tax profit of $3000. By 30 June 2019, Tasmanian Ltd has sold one-third of
    these to other entities for $6000.
    (b) On 1 January 2018, Tasmanian Ltd sold an item of machinery to Tiger Ltd that Tiger
    Ltd classified as inventory. At the date of sale, Tasmanian Ltd had recorded the asset at
    a carrying amount of $150 000 (net of $20 000 depreciation, calculated using a 10% p.a.
    straight-line method). Tiger Ltd recorded the asset at $160 000. Tiger Ltd sold it to Oz
    Animals Ltd on 15 August 2019 for $100 000.
    (c) Tasmanian Ltd supplies motor vehicles to its executives, and the managing director is
    supplied with a new Ferrari every 2 years. On 1 January 2017, as the managing
    director of Tasmanian Ltd wanted a new car, the company sold the Ferrari to Tiger Ltd
    to be used by the newly appointed accounting graduate. At the date of sale, the car had
    a carrying amount of $240 000, and was sold to Tiger Ltd for $260 000. The vehicle is
    depreciated at 20% p.a. straight-line by Tiger Ltd, and is still being used by the
    accounting graduate.
    (d) Tasmanian Ltd installed new computing systems at a cost of $825 000 on 1 September
    2018. These are depreciated evenly over a 5-year period. To assist in the installation and
    training, Tiger Ltd sent one of its young computer experts to Tasmanian Ltd for a 6-
    month period, charging the company $100 000 for the services provided.

    Required
    (a) Prepare the consolidation worksheet entries at 30 June 2019 to adjust for the effects of
    the above inter-entity transactions.
    (b) Ms Echidna is concerned that the auditors may require her to explain the adjustments
    she has made. Provide suitable explanations for transactions (a) and (b) above.
    (LO2, LO3 and LO4)
    Question 11.7

    Consolidation worksheet

    On 1 July 2018, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30
    000 in cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity
    of Glider Ltd consisted of $66 000 share capital and $6000 retained earnings.

    At 1 July 2018, all the identifiable assets and liabilities of Glider Ltd were recorded at
    amounts equal to their fair values except for:

    The plant was considered to have a further 5-year life. The patents were sold for $120 000
    to an external entity on 18 August 2018. The inventory was all sold by 30 June 2019.

    Additional information
    (a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing
    process. At 1 July 2019, Glider Ltd held inventory sold to it by Fluffy Ltd in the
    previous year at a profit of $600. During the 2019–20 year, Fluffy Ltd sold inventory to
    Glider Ltd for $21 000. None of this was on hand at 30 June 2020.
    (b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2019–20 year, Glider
    Ltd sold goods to Fluffy Ltd for $4500. At 30 June 2020, inventory which had been sold
    to Fluffy Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory.
    (c) On 1 July 2019, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant
    had a carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type
    of plant is depreciated at 10% p.a. on cost.
    (d) On 1 January 2019, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The
    inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant.
    Plant of this type is depreciated by Glider Ltd at 20% p.a.
    (e) On 1 March 2020, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd
    classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000
    which included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on
    31 March for $9900.
    (f) The tax rate is 30%.
    At 30 June 2020, the following financial information was provided by the two companies:

    Required
    Prepare a consolidation worksheet for the preparation of the consolidated financial
    statements of Fluffy Ltd at 30 June 2020.

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