Question

In: Accounting

(a) Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd,...

(a) Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows:

Required (i) Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry. (2.5 marks) (ii)Determine the consolidation worksheet entries in the following year, assuming the inventory has been –sold, and explain the adjustments on a line-by-line basis. (1.5 marks)

Solutions

Expert Solution

Since the question did not provided the entry by the accountant - the answer is being provided with correct entry to be made in the books.

Question 1 - Correct entry should be as below -

Sales Dr 15,000

Cost of sales Cr 13,500

Inventory Cr 1,500

Deferred tax asset Dr 450

Income tax expense Cr 450

a) Sales: Recorded sales = $15 000 + $8 000 = $23 000

Group sales = $8 000 (note that only external sales shall be taken for this purpose)

Adjustment = 23000 - 8000 = $15 000

b) Cost of sales:Recorded = $12 000 + ½ x $15 000 = $19 500

Group = ½ x $12 000 = $6 000

Adjustment = 19500 - 6000 = $13 500

c) Inventory:Recorded = ½ x $15 000 = $7 500

Group = ½ x $12 000 = $6 000

Adjustment = 7500 - 6000 = $1 500

d) DTA: First adjustment is reduced by $1 500, impacting carrying amount of the asset. this impact in the carrying amount creates a temporary difference between it and the tax base giving rise to a deferred tax benefit.

Question 2 -

Adjusting entry =

Retained earnings (op bal) Dr 1050

Income tax expense Dr 450

Cost of sales Cr 1500

Retained earnings = Profit on sale of inventory(after tax of 30%)  = (15000 -12000)(1-0.3)

= 2100

Retained earning (since only half realised) = 2100*50% = 1,050

Income tax = DTA in prioir period reversal = 450

Cost of sales

So this shall be adjusted against cost of sales value of (recorded sale - group)*50% = (15000-12000)*50% = 1500

hence cost of goods sold = 1,500

ekkarill92 answered 2 years ago
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