Question

subject: company accounting Topic 7 - Consolidation: Intragroup Transactions (cont); Non-controlling Interest

question:

Violet Ltd owns all the share capital of Indigo Ltd. The following transactions are independent:

1. Indigo Ltd gives $55 000 as an interest-free loan to Violet Ltd on 1 July 2019. Violet Ltd made a $20 000 repayment by 30 June 2020.
2. Indigo Ltd rented a spare warehouse to Violet Ltd starting from 1 July 2019 for 1 year. The total charge for the rental was $3 500, and Violet Ltd paid half of this amount to Indigo Ltd on 1 January 2020 and the rest on 1 July 2020.
3. During March 2020, Indigo Ltd declared a $5000 dividend. The dividend was paid in August 2020.

Required

In relation to the above intragroup transactions:

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

2.   Explain in detail means to discuss WHY you DR and CR each of these items - what you are trying to achieve by posting these journals.

Answer 1

ANSWER:

(1)Adjusting Journal Entries(These entries are being created in the books of indigo ltd.)(considering Financial Year as 1st Jul'19 - 30th Jun'20):

1st entry: Indigo gave a loan to violet ltd interest free, and the loan was repaid for $20,000 below are the journal entries for the same:

Violet Ltd(Loan Account) Dr.	55,000
To Cash at bank	55,000

Loan repaid by Violet Ltd.

Cash at Bank a/c Dr.	20,000
TO Violet Ltd (Loan Account)	20,000

2nd Entry: Warehouse rented to violet limited for a year, below are the journal entries for the same:

Accrued Rent a/c Dr.	3,500
To Rent Expense	3,500

Being half of the payment been received on 1st Jan'20, journal entry follows:

Cash a/c Dr.	1,750
To Accrued Rent	1,750

3rd Entry: Being Dividend declared:

Dividends a/c Dr.	5,000
To Dividends Payable	5,000

These adjusting journal entries would be created for the Financial Year 1st Jul'20 - 30th Jun'20.

(2)Explain in detail means to discuss WHY you DR and CR each of these items:

Adjusting Journal Entries Definition: Adjusting journal entries are the entries which are made at the end of a financial year to record all the unrecorded,recorded and realized expenses and incomes for the financial year.

Explaination of each adjusting entry: First entry, since the loans have been given to an organisation then the loan is meant to be receivable from them, hence the loans receivables a/c needs to be debited and since the cash gets reduced post providing the loan hence the same is credited.

Second entry, since some of the loan have been received from the organisation,hence the loan account needs to be credited as the amount have been received and the cash a/c needs to be debited as the same has been received in bank.

Third entry, warehouse rented to the organization, since the place has already been rented out and the rent have not been recieved yet, this calls for a accrued account for rent which states that if the rent have not been received yet but the utilization of the same has begun.Hence the same needs to be debited and an expense has been created for rents so the same gets credited.

Fourth entry, since half of the rent had been received from the organization so the cash account needs to be credited and the accrued rent account needs to be credited.

Fifth entry, Since the dividends have been declared by the organisation, dividend comes as an income for the organization hence debited and these needs to be paid so the liability of dividends payables accours hence credited.

Comment for any more clarifications.