Question

subject: company accounting    

  Consolidation

Indigo Ltd gives $55 000 as an interest-free loan to Violet Ltd on 1 July 2019. Violet Ltd made a $20 000 repayment by 30 June 2020.Violet Ltd owns all the share capital of Indigo Ltd. The following transactions are independent:

1. Indigo Ltd rented a spare warehouse to Violet Ltd starting from 1 July 2019 for 1 year. The total charge for the rental was $3 500, and Violet Ltd paid half of this amount to Indigo Ltd on 1 January 2020 and the rest on 1 July 2020.
2. During March 2020, Indigo Ltd declared a $5000 dividend. The dividend was paid in August 2020.

Required

In relation to the above intragroup transactions:

1.      Prepare adjusting journal entries for the consolidation worksheet at 30 June 2020.

2.     Explain in detail why you made each adjusting journal entry.

Answer 1

Ans) Adjusting entries are passed in consolidated financial statements for netting off income and expenses of intra group transactions, so that consoliated financial statements are prepared net off intra group transactions and shows real external profit of group.

Following are adjusting journal entries for the consolidation worksheet at 30 June 2020 along with explanation are as follows:

i) Interest free loan: There will be no adjustment entry for the above transaction as loan given is interest free and hence there will be no interest income in the books of Indigo ltd. nor interest expenses in Voilet ltd. In balance sheet, intra group assets and liabilities are eliminated.

ii) Rental Income: Half amount is received upto June 2020 and half is receivable as on 30 June 2020:

Rental income A/c Dr $1750

Rental Income payable A/c Dr $1750

To Rental Expenses A/c Cr $1750

To Rental Income receivable A/c Cr $1750

As rental income is shown as income in the books of Indigo Ltd and rental expenses are shown as expenses in Voilet Ltd. means profit is shown in Indigo Ltd. and expenses are deducted in Voilet Ltd. Hence, for netting off income and expenses above adjusting entries are to be made in consolidated FS.   

iii) Dividend Declared: As dividend is declared before 30 June 2020 and paid in August 2020, hence to netoff this dividend receivable and dividend payable below adjusting entry is to passed:

Dividend Payable A/c Dr $5000

To Dividend Receivable A/c Cr $5000