Question

1. Barney Ltd owns all of the share capital of Betty Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2022 and 30 June 2023.

1. On 10 June 2022, Barney Ltd sold inventories to Betty Ltd for $16 000 in cash. The inventories had previously cost Barney Ltd $12 000. 60% of these inventories were unsold by Betty Ltd at 30 June 2022 and 30% at 30 June 2023.      

2. On 1 July 2021, Barney Ltd sold equipment costing $10 000 to Betty Ltd for $12 000. Barney Ltd had not charged any depreciation on the asset before the sale as it just purchased it from an external entity. Both entities depreciate items of equipment at 10% p.a. on cost. The equipment is still held by Betty Ltd at 30 June 2023. Neither entity uses a Gain on Sale account.                       

Required

In relation to the above intragroup transactions, prepare adjusting journal entries for the consolidation worksheet at 30 June 2022 and 30 June 2023. Only the adjusting entries need be shown.

Answer 1

As asked in the question only adjusting entries are to be recorded as follows:

Date	Transaction	Debit (in $)	C redit(in $)
30.06.2022	Closing inventory -Dr	7200
	To Profit and Loss a/c Cr.		7200
	(Refer Note 1 given under the journal entries)
30.06.2023	Closing Inventrory - Dr.	3600
	To Profil and Loss a/c.-Cr.		3600
	(Refer Note 2 given)
30.06.2022	Depreciation a/c - Dr.	1000
	To Proviion for Depreciation a/c -Cr.		1000
	(Refer Note 3)
30.06.2023	Depreciation a/c - Dr.	1000
	To Provision for Depreciation a/c - Cr		1000
	(Refer Note 3)
30.06.2022	Profil and Loss a/c-Dr.	1200
	To Provison for tax a/c-Cr		1200
	(Refer Note 4)
30.06.2023	Profit and Loss a/c - Dr.	300
	To  Provison for tax a/c-Cr		300
	(Refer Note 5)

Note 1: The cost of inventory is $12,000. Out of this 60% is unsold on 30.06.2022. so closing stock or inventrory on 30.06.20222 is calculated as follows:

12,000 x 60/100 = $7200

Note 2: Out of $12,000 cost of inventory, 30% remained unsold on 30.06.2023, so value closing inventory on 30.06.2023 is 12,000x30/100=$3,600

Note 3: The cost of the equipment on 01.07.2021 is $10,000. The equipment is held by Betty Ltd for 2 years till 30.062023. Depreciation at 10% is calculated on $10, 000 for 2 years as follows:

10,000 x 10% = $1,000 for 30.06.2022 and $1,000 for 30.06.2023(assuming straight line method of Depreciation)

Note 4: Cost of inventory is $12,000 and is sold for $16,000. So profit is Selling Price - Csot Price,

$16,000 - $12,000 = $4,000.

So ttax at 30% on $4,000 is 4,000 x 30/100 = $ 1,200.

Note 5: Cost of equipment is $10,000 and is sold for $12,000.

So profit is Selling Price - cost of equipment   = $2,000

Less Depreciation at 10% on cost

-- 10,000 x 10/100 = $1,000

Taxable income after depreciation   = $1,000

So tax at 30% on $1,000 is 1,000 x 30/100 = $ 300.