Question

Ocean Ltd is a wholly-owned subsidiary of Breeze Ltd. The rate of company income tax is 30%. During the year ended 30 June 2017 the accounts revealed:

i               Ocean Ltd paid management fees of $15,000 to Breeze Ltd.
ii              Breeze Ltd sold inventory for $17,500 to parties external to the group. Ocean Ltd had previously sold this inventory to Breeze Ltd for $15,000. The inventory had cost Ocean Ltd $10,000.
iii             Breeze Ltd sold inventory to Ocean Ltd for $40,000. This inventory had cost Breeze Ltd $20,000. Ocean Ltd sold three-quarters of this inventory to parties external to the group.
iv             On 1 July 2016, Ocean Ltd sold machinery to Breeze Ltd for $150,000. The machinery was originally purchased by Ocean Ltd on 1 July 2012. The carrying amount of the machinery at the time of sale was $120,000 (cost $200,000, accumulated depreciation $80,000). The machinery is assessed as having a remaining useful life of 5 years from the date of sale. Straight-line depreciation is used.

Required
A) Prepare the consolidation elimination journal entries required for the above intra-group transactions. Show workings and calculations.

Answer 1

Date	Accounts	Debit	Credit
i	Management fees income A/c---Dr	15,000
	To Management fees expenses A/c		15,000
	(Being mangement fees paid eliminated)
ii	Revenue A/c---Dr	15,000
	To Cost of Goods Sold A/c		15,000
	(Being inter company sales eliminated)
iii	Revenue A/c---Dr	40,000
	To Cost of Goods Sold A/c		35,000
	To Inventory A/c		5,000
	(Being inter company sales eliminated and unrealised profit on closing inventory also removed)
	Deferred tax assets A/c---Dr	1,500
	To Current tax expenses A/c		1,500
	(Being DTA created on unrealised profit eliminated of 5,000)
iv	Profit on sale of machine A/c--Dr	30,000
	To Machine A/c		24,000
	To Depreciation A/c		6,000
	(Being unrealised profit reversed)
	Deferred tax assets A/c---Dr	7,200
	To Current tax expenses A/c		7,200
	(Being DTA created on unrealised profit eliminated of 24,000)

Notes-
ii	Goods sold to external party and hence no unrealised profit entry and tax implications
iii	COGS = 20,000 (Breeze) + 30,000 (Ocean)-15,000 (20,000*3/4 sold) = 15,000
	Tax impact on 5,000 unrealised profit
iii	Profit on machine 30,000 - depreciation 6,000= 24,000 unrealised profit * 30% for tax impact