Question

S Ltd owns all the share capital of R Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2020 or 30 June 2021.

1. On 1 July 2019, S Ltd sold a motor vehicle to R Ltd for $17 000. This had a carrying amount to S Ltd of $12 000. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost.

2. R Ltd manufactures items of machinery which are used as property, plant and equipment by other companies, including S Ltd. On 1 January 2020, R Ltd sold such an item to S Ltd for $67 000, its cost to R Ltd being only        $60 000 to manufacture. S Ltd charges depreciation on these machines at 20% p.a. on the diminishing value.

3. S Ltd manufactures certain items which it then markets through R Ltd. During the period ended 30 June 2021, S Ltd sold for $12 000 items to R Ltd at cost plus 20%. By 30 June 2021, R Ltd has sold to external entities 75% of these transferred items.

4. R Ltd rented a spare warehouse from S Ltd for $60 000 p.a. The rental contract started at 1 January 2020 and ends at 31 December 2021. The payments are made annually in advance on 1 January.

Required

In relation to the above intragroup transactions:

       Prepare adjusting journal entries for the consolidation worksheet at 30 June 2020 and 30 June 2021.

Answer 1

Answer:

30 June 2020

.

(a)      Proceeds on sale of motor vehicle                               Dr               17 000

                         Carrying amount of motor vehicle sold         Cr                                               12 000

                         Motor vehicles                                                        Cr 5 000

OR

            Gain on sale of vehicles                                                     Dr 5 000

                   Motor vehicles                                                               Cr 5 000

.

            Deferred tax asset (5,000 × 30%) Dr 1500

                         Income tax expense                                             Cr 1500

.

            Accumulated depreciation – motor vehicle              Dr 500

                         Depreciation expense (5,000× 10%) Cr 500

.

            Income tax expense (500 ×30%) Dr 150

                         Deferred tax asset                                                 Cr 150

.

.

(b)      Sales revenue                                                                       Dr               67 000

                         Cost of sales                                                             Cr 60 000

                         Machinery                                                                 Cr                                                  7 000

.

            Deferred tax asset                                                              Dr                 2 100

                         Income tax expense                                             Cr                                                  2 100

.

            Accumulated depreciation - machinery                      Dr                    700

                         Depreciation expense                                          Cr                                                     700

.

            Income tax expense                                                           Dr                    210

                         Deferred tax asset                                                 Cr                                                     210

.

30 June 2021

.

(a)      Retained earnings (1/7/20)                                              Dr 5 000

                   Motor vehicles                                                               Cr 5 000

.

            Deferred tax asset                                                              Dr 1500

                         Retained earnings (1/7/20)                                Cr 1500

.

            Accumulated depreciation – motor vehicle              Dr 1000

                         Depreciation expense                                          Cr 500

                         Retained earnings (1/7/20)                                Cr 500

.

            Retained earnings (1/7/20)                                              Dr 150

            Income tax expense                                                           Dr 150

                         Deferred tax asset                                                 Cr 300

(b)      Retained earnings (1/7/20)                                              Dr                 7 000

                         Machinery                                                                 Cr                                                  7 000

.

.

            Deferred tax asset                                                              Dr                 2 100

                         Retained earnings (1/7/20)                                Cr                                                  2 100

.   

            Accumulated depreciation - machinery                      Dr                 1 960

                         Depreciation expense                                          Cr                                                  1 260

                         Retained earnings (1/7/20)                                Cr                                                     700

           

            Retained earnings (1/7/20)                                              Dr                    210

            Income tax expense                                                           Dr                    378

                         Deferred tax asset                                                 Cr                                                     588

(c)       Sales revenue                                                                       Dr               12 000

                         Cost of sales                                                             Cr                                               11 500

                         Inventories                                                               Cr                                                     500

            Deferred tax asset                                                              Dr                    150

                         Income tax expense                                             Cr                                                     150

(d)       Rent revenues                                                                     Dr 60,000

                         Rent expenses                                                        Cr 60,000

.

.

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Really hope this helps! Thankyou!

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