ACCT4104

Advanced
financial
accounting

Tutorial Ch.22 –2
By. Cliff Kong
Further Practice Questions

D) On 1 January 2015, Isabel Ltd sold inventory costing $6,000 to Layla Ltd at a
transfer price of $8,000. On 1 September 2015, Layla Ltd sold half these goods back
to Isabel Ltd, receiving $3,000 from Isabel Ltd. Of the remainder kept by Layla Ltd,
half was sold in January 2016 to Anna Ltd at a loss of $200.

Answer:

Retained earnings (1/7/15) Dr 2,000

Sales revenue Dr 3,000
Cost of sales Cr 4,500
Inventory Cr 500
Event 1:
1/1/2015:
Isabel Ltd (subsidiary) sold inventory costing $6,000 to Layla Ltd (parent) at a transfer
price of $8,000.

Event 2:
1/9/2015:
Layla Ltd sold half these goods back to Isabel Ltd, receiving $3,000 from Isabel Ltd.

Event 3:
During 1/2016:
Of the remainder kept by Layla Ltd, half was sold to Anna Ltd (an outsider) at a loss of
$200.
Event 1:
1/1/2015:
Isabel Ltd sold inventory costing $6,000 to Layla Ltd at a transfer price of $8,000.

Company level:
Isabel Ltd(subsidiary): Layla Ltd(parent):

Cash Dr. 8,000 Inventory Dr. 8,000

Sales revenue Cr. 8,000 Cash Cr. 8,000
COGS Dr. 6,000
Inventory Cr. 6,000

Group level:
No entry

Adjustments:
Retained earnings Dr. 2,000
Inventory Dr. 6,000
Inventory Cr. 8,000

Our “Now” is already 2016

Event 2:
1/9/2015:
Layla Ltd sold half these goods back to Isabel Ltd, receiving $3,000 from Isabel Ltd.

Company level:
Layla Ltd(parent):
Isabel Ltd(subsidiary):
Cash Dr. 3,000
Sales revenue Cr. 3,000
Inventory Dr. 3,000
Cash Cr. 3,000
COGS Dr. 4,000 (8000/2)
Inventory Cr. 4,000

Group level:
No entry

Adjustments:
Sales revenue Dr. 3,000
Inventory Dr. 4,000
Inventory Cr. 3,000
COGS Cr. 4,000
Event 3:
During 1/2016:
Of the remainder kept by Layla Ltd, half was sold to Anna Ltd at a loss of $200.

Company level:
Layla Ltd(parent):
Anna Ltd, an outsider.
Cash Dr. 1,800
The sales is not to be adjusted, but the Sales revenue Cr. 1,800 Half of
inventories’ cost on Group level is 4,000
$3,000, not $4,000. COGS Dr. 2,000
Inventory Cr. 2,000

Group level: Cash Dr. 1,800

Sales revenue Cr 1,800 Half of
3,000
COGS Dr. 1,500
Inventory Cr 1,500

Adjustments: Inventory Dr. 500

COGS Cr. 500
Adjustments: Retained earnings Dr. 2,000
Event 1: Inventory Cr. 2,000

Adjustments: Sales revenue Dr. 3,000

Inventory Dr. 1,000
Event 2: COGS Cr. 4,000

Adjustments:
Inventory Dr. 500
Event 3: COGS Cr. 500

Combined Retained earnings (1/7/15) Dr. 2,000

Adjustments Sales revenue Dr. 3,000
Cost of sales Cr. 4,500
Inventory Cr. 500
Additional Exercise
All the identifiable assets and liabilities of Madeleine Ltd were recorded at fair value
except for the following assets:
Carrying Amount Fair Value
Case 1: Motor Vehicles (cost $18 000) $15 000 $16 000
Case 2: Furniture and fittings (cost $30 000) $24 000 $32 000

What are the Business combination valuation entries on the Acquisition day?

Answer:

Case 1:
Accumulated depreciation – motor vehicles Dr 3 000
Motor vehicles Cr 2 000
BCVR Cr 1 000

Case 2:
Accumulated depreciation - F&F Dr 6 000
Furniture & fittings Dr 2 000
BCVR Cr 8 000
Case 1 – Original Cost > Fair value
Carrying Amount Fair Value
Motor Vehicles (original cost: $18 000) $15 000 $16 000

Before After Change

Cost 18,000 16,000 (2,000)
Accum. Dep 3,000 - (3,000)

Answer:

Accumulated depreciation – motor vehicles Dr 3 000

Motor vehicles Cr 2 000
BCVR Cr 1 000
Case 2 – Original Cost < Fair value
Carrying Amount Fair Value
Furniture and fittings (original cost: $30 000) $24 000 $32 000

Before After Change

Cost 30,000 32,000 2,000
Accum. Dep 6,000 - (6,000)

Answer:

Accumulated depreciation - F&F Dr 6 000

Furniture & fittings Dr 2 000
BCVR Cr 8 000
 Fair value adjustment VS Intra group transaction

On acquisition day 1-1-2021, fair value of Subsidiary Ltd. is being identified for
Equipment A:
Carrying Amount Fair Value
Case 1: Equipment A (original cost: 120,000) $100 000 $102 000

Case 2: On the same day, Equipment B was sold by Parent Ltd to Subsidiary Ltd, for
$102 000. The carrying amount was $100 000 (original cost: $120 000).

Both of the Equipment has a further 5-year life.

What are the consolidation adjustments on year ended day 31-12-2023?

Case 1 – Fair value adjustment
Carrying Amount Fair Value
Equipment A (original cost: 120,000) $100 000 $102 000

On acquisition day: Before After Change Group level

Cost 120,000 102,000 (18,000)

Accum. Dep. 20,000 - (20,000)
Yearly Dep. 20,000 20,400 400

Answer: year ended day 31-12-2023 (3 years later)

Accumulated depreciation Dr 20 000

Equipment A Cr 18 000
BCVR Cr 2 000

Retained earnings [400 x 2years] Dr 800

Depreciation expense Dr 400
Accumulated depreciation (400 x 3) Cr 1 200
Case 2 – Intra group transaction: On the same day, Equipment B was sold by Parent
Ltd to Subsidiary Ltd, for $102 000. The carrying amount was $100 000 (original cost:
$120 000).

Company Group
On acquisition day:
level level Difference
At Group
Cost 102,000 120,000 18,000 level, the
trade didn’t
Accum. Dep. - 20,000 20,000 happen.
Gain on sale 2 000 0 (2 000)
Yearly Dep. 20,400 20,000 (400)
Answer: year ended day 31-12-2023 (3 years later)

Retained earnings Dr 2 000

Equipment B Dr. 18 000
Accumulated depreciation Cr 20 000

Accumulated depreciation (400 x 3) Dr 1 200

Depreciation expense Cr 400
Retained earnings [400 x 2years] Cr 800