Question

Question 5 Week 9 (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)

(b) On 1 July 2016 Liala Ltd sold an item of plant to Jordan Ltd for $450000 when its’ carrying value in Liala Ltd book was $600000 (costs $900000, accumulated depreciation $300000). This plant has a remaining useful life of five (5) years form the date of sale. The group measures its property plants and equipment using a costs model. Tax rate is 30 percent.

Required: Pass the necessary entries on 30 June 2017 and 30 June 2018 to eliminate the intra-group transfer of equipment.

Answer 1

All amounts are in $

Part a :

(i)

No entry is given in question, so here I'm accounting the correct adjustment entry

Sales $15,000

Cost of Sales $13,500

Inventory $1500

(Consolidation adjustment entry accounted)

Deferred Tax Asset $450

Income tax expense $450

(Deferred tax adjustment due to timing difference accounted)

Working :

1. Sales made by Jessica Ltd to Amelia Ltd is reversed, which is $15,000

2.

Total Cost of Sales in Separate financial statements = Cost of Sales in Jessica Ltd + Cost of Sales in Amelia Ltd

= 12,000 + 50% x 15,000 (only 50% of goods are sold by Amelia Ltd)

= 19,500

Actual Cost of sales must be = 50% of 12,000 (because only 50% goods are sold, also original cost to parent is taken

= 6,000

Excess to be reversed = 19,500 - 6,000 = 13,500

3.

Inventory in separate financial statements of Amelia = 50% of 15,000 = 7,500

Actual inventory = 50% of 12,000 (original cost to be taken)

= 6,000

Excess to be reversed = 7,500 - 6,000 = 1,500

4. Deferred tax asset is created as the inventory is overstated in separate financial statements of amount $1500.

So DTA = 30% of 1,500 = 450

(ii)

Retained Earnings (op bal) $1,050

Income tax Expense $450

Cost of Sales $1,500

Working :

After tax profits of Jessica = (15,000-12,000) x 70%

= 2,100

But only 50% of is sold to outsiders, so realised only 1,050 that year and the remaining 1,050 is realised this year.

Income tax expense is reversed as the timing difference is nullified this year.

Cost of Sales in Separate financial statements next year is $7,500 ($15,000 x 50% in Amelia books). But actual cost of sales is $6,000 ($12,000 x 50%). So the remaining is reversed.