Question

Question 2

(a)    Identify and discuss the three elements of control in determining whether to prepare consolidated financial statements.  

(b)    Dingo Ltd owns all of the shares of Bilby Ltd. On 1 May 2020, Bilby Ltd sold inventory costing $300 to Dingo Ltd for $360 on credit. On 30 June 2020, only half of these goods had been sold by Dingo Ltd, but Dingo Ltd had paid $280 back to Bilby Ltd. The tax rate is 30%. The adjusting consolidation entries at 30 June 2020 were:

         Sales revenue                                                   Dr             360

                   Cost of sales                                            Cr                                      330

                   Inventory                                                Cr                                        30

         Deferred tax asset                                            Dr                 9

                   Income tax expense                               Cr                                          9

         Accounts payable                                             Dr               80

                   Accounts receivable                               Cr                                        80

Required:

Explain the rationale behind the adjustments to each of the accounts.

Answer 1

1. As per the IFRS 10,  three elements of control in determining whether to prepare consolidated financial statements:e

1. The investor should have major power to influence the financial and managerial dedications of the investee.
2. The investor shall have right over the variable income from the investee.
3. The investor's power shall extend to impact those returns from the investee.

2. This is a case of Upstream sales ie sale by subsidiary to the parent. So,

	Particulars	Debit	Credit	Rationale
1.	Sales Dr	360		For elimination of inter company sales revenue
	To Cost of Goods Sold		330	For elimination of cost of sales made by subsidiary to the parent ie. 300. And also eliminate the gross profit element in cost of goods sold by parent to outsider ie (360-300)*50% = 30. So 300+30 = 330
	To Inventory		30	Since half of goods are unsold by the parent, we eliminate the goss profit element in order to bring the inventory value to cost ie, (360-300)*50%= 30
2.	Deferred Tax asset Dr	9		Since the subsidiary is subject to tax of 30%, it has to incurr as tax on the gross profit ie 360-300 = 60 pertaining to the sales made to the parent. Now 50% of such goods remain unsold. Thus taxes already paid will be considered as a deferred tax asset. Thus 60*30%*50% = > 9 will be treated as deferred tax asset while consolidation.
	To income tax expense		9	For elimination of income tax charged on the profit pertaining to the unsold inventory
3	Accounts Payable Dr	80		Elimination of inter company debts. Sales value was 360. Out of which 280 is already paid. Hence 80 is outstanding mutual debts. Thus eliminated
	To Accounts Receivable		80