Question

On 1 July 2018, River Ltd acquired 90% of the share capital to gain control of Creek Ltd. The following intra-group transactions occurred during the year ending 30 June 2019.

1. During the 2018 - 2019 period, River Ltd sold inventory to Creek Ltd for      $2,000,000. River Ltd purchased this inventory for $1,700,000. By 30 June 2019, Creek Ltd has 30% of that inventory still on hand as unsold.
2. Creek Ltd declared a final dividend of $1,500,000 from current year’s profits.                                                                                     
3. Creek Ltd paid Water River Ltd, a consultancy fee of $70,000 during the year.                                                                                   
4. River Ltd provided a loan of $10,000,000 to Creek Ltd. The loan charges 5% interest
   annually. One half of the interest for the current year remains unpaid as at
   30 June 2019.   
5. Creek Ltd sold land to River Ltd for $1,350,000. The land was purchased by Creek Ltd for $600,000.   

Prepare the journal entries required to eliminate the intra-group transactions noted above.

Answer 1

JOURNAL ENTERIES TO ELIMINATE INTRA-GROUP TRANSACTIONS: (year ended 30.06.2019)

a.) River Ltd. sold goods to Creek Ltd.

Entry in the consolidated books to eliminate unrealised profit in the books of River Ltd. on goods sold to Creek Ltd.:

[PROFIT REDUCED] Profit & Loss a/c- Dr. (River Ltd.) $90,000 (Refer the calculation below)

[ASSET REDUCED] To Inventory-in-hand (Creek Ltd.) $90,000

Calculation:

Inventory-in-hand (in the books of Creek Ltd.) as on 30.06.2019= 30% of $2,000,000 = $600,000 (at SP)

Profit on goods sold by River Ltd.= $2,000,000- $1,700,000 = $ $300,000 i.e. 15% of $ 2,000,000

Therefore, profit on unsold stock(in the books of Creek Ltd.)=  15% of $600,000 = $90,000

b.) Creek Ltd. declared dividend from current year's profit:

Entry in the consolidated books to eliminate dividend payable to River Ltd:

[LIABILITY REDUCED]   Dividend Payable a/c- Dr. (Creek Ltd.) $1,350,000 [90% of $1,500,000]

[ASSET REDUCED]     To Dividend Rceivable from Creek Ltd. a/c  (River Ltd.) $1,350,000

c.) Creek Ltd paid Water River Ltd, a consultancy fee of $70,000 during the year:

No journal entry is required to eliminate the effect of consultancy fee paid by Creek Ltd.. This is because the given fee is paid to Water River Ltd. and not to River Ltd. Hence, the mentioned company is not a holding company of Creek Ltd. and no elimination is to be made for the same.

d.) River Ltd. provided a loan to Creek Ltd.:

Entry in the consolidated books of accounts to eliminate the effect of interest remaining unpaid as on 30.06.2019:

[LIABILITY REDUCED] Interest payable to River Ltd. a/c- Dr. [Creek Ltd.]   $250,000 (Refer the calculation below)

[ASSET REDUCED] To Interest Receivable from Creek Ltd. a/c [River Ltd.] $250,000

Calculation:

Interest on loan= Loan amount* Rate on interest

= $10,000,000* 5% = $500,000 annually

Therefore, interest unpaid as on 30.06.2019= 1/2 * $500,000 = $250,000

e.) Creek Ltd. sold Land to River Ltd. for $1,350,000

Purchase price of the land by Creek Ltd.= $600,000

Therefore, profit on sale of land recorded in the books of Creek Ltd.= $1,350,000- $600,000 = $750,000

Entry in the consolidated books to eliminate the effect of profit on sale of land:

[PROFIT REDUCED] Profit on sale of land a/c- Dr. $750,000

[ASSET REDUCED] To Land a/c $750,000 **

** [ Being land recorded at cost price in consolidated books, by eliminating the profit]