Question

On 1 January 2019 Liam Ltd acquired 90% of the issued shares of Ian Ltd. During the year ended 31 December 2019 the following intra group transactions occurred:

• Sales of inventory:

Ian Ltd sold inventory to Liam Ltd $360,000. This inventory costed Ian Ltd $300,000. At 31 December 2019 Liam Ltd held 50% of the inventory acquired from Ian Ltd.

• Intragroup sale of equipment:

An item of equipment originally acquired by Liam Ltd on 1 January 2017 at a cost of $400,000 was sold to Ian Ltd on 1 January 2019 for $340,000. Liam Ltd had depreciated this asset at 10% per annum on a straight-line basis with no scrap value. There is no change in the asset expected life subsequent to the sale.

• During the year ended 31 December 2019 the following dividends were paid:

• Liam Ltd     $100,000
• Ian Ltd        $40,000

• On 30 June 2019 Liam Ltd lent Ian Ltd $100,000. Interest on this loan at 8% was paid up to 31 December 2019.

Required:

Prepare the consolidation journal entries required to eliminate the above intragroup transactions for the year ended 31 December 2019. Assume a tax rate of 30%.

Answer 1

Journal Entries to Eliminate Intra Group Transactions:-

Date	Particulars	Debit	Credit
31 Dec	Sale of Inventory:- Profit And Loss A/C    Dr. To Inventory A/C (Being Unrealised Profit on Inventory is Eliminated) (3,60,000-3,00,000=60,000*50%/100) =30,000	30,000	30,000
31 Dec	Sale of Equipment:- Profit And Loss A/C    Dr. To Equipment A/C (Being Unrealised Profit on Equipment is Eliminated) (Book Value at the time of Sale=3,20,000 Selling Price=3,40,000 Unrealised Profit=20,000 Less:Depreciation already eliminated=20,000*10%=(2,000) Unrealised Profit=18,000	18,000	18,000
31 Dec	Dividend Payment by Liam LTD: Profit And Loss A/C Dr. To Cash(Dividend) (Being Dividend Paid by Holding Company)	100,000	100,000
31 Dec	Dividend Payment by Lan LTD:- Cash A/c Dr(40,000*90%)    To Profit and Loss A/C (Being Dividend Recieved From Subsidiary Company)	36,000	36,000
31 Dec	Interest Payment By Susidiary:- Profit And Loss A/C Dr.    To Interest Income A/c (100,000*8%*6/12=$4,000) (Being Interest Income Is Eliminated on Intra Group Lending)	4,000	4,000