Question

(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)

Answer 1

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