Question

1. Cook Ltd owns all of the share capital of James Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2019 or 30 June 2020.

1. In January 2020, Cook Ltd sells inventories to James Ltd for $10 000 in cash. These inventories had previously cost Cook Ltd $7 000, and remain unsold by James Ltd at the end of the period.                                                             

2. In February 2020, Cook Ltd sells inventories to James Ltd for $15 000 in cash. These inventories had previously cost Cook Ltd $12 000, and are on-sold externally on 2 April 2020.                                                                          

3. In February 2020, James Ltd sells inventories to Cook Ltd for $22 000 in cash (original cost to James Ltd was $16 000) and one quarter (25%) are on-sold externally by 30 June 2020.                                                                   

4. In March 2020, Cook Ltd sold inventories for $10 000 to Zara Ltd, an external entity. These inventories were transferred from James Ltd on 1 June 2019. The inventories had originally cost James Ltd $8000, and were sold to Cook Ltd for $12 000.                                                                                                      

Required

In relation to the above intragroup transactions, prepare adjusting journal entries for the consolidation worksheet at 30 June 2020. Only the adjusting entries need be shown.

Answer 1

a
	Particulars	Debit	Credit
(i)	Revenue A/c	$10,000
	Cost of sales A/c		$7,000
	Inventory A/c		$3,000
	Since 100% of inventory remains unsold , unrealised profit on 100% inventory to be eliminated
(ii)	Deferred tax asset A/c ( $3,000*30%)	$900
	Income tax expense A/c		$900
	Note : Deferred tax asset is created as Accounting base of inventories ($7,000) is less than Tax base of inventories ($10,000)
b	As there is no unsold inventory for the year ended 30 June 2020 , there is no unrealised profit and no adjustment entry is required to be passed
c	On Consolidation , the unrealised profit on Closing inventories will be eliminated from the group's profit and hence, the unsold inventory of 75% has to be recorded at cost in the books of group
	Particulars	Debit	Credit
(i)	Revenue A/c   ($22,000*75%)	$16,500
	Cost of sales A/c   ($16,000*75%)		$12,000
	Inventory A/c [($22,000-$16,000)*75%]		$4,500
(ii)	Deferred tax asset A/c ( $4,500*30%)	$1,350
	Income tax expense A/c		$1,350
	Note : Deferred tax asset is created as Accounting base of inventories ($12,000) is less than Tax base of inventories ($16,500)
d	As there is no unsold inventory for the year ended 30 June 2020 , there is no unrealised profit and no adjustment entry is required to be passed. The inventory sold in march 2020 pertains to previous year for which adjustment entry would have been passed in previous year