Question

Liala Ltd acquired all the issued shares of Jordan Ltd on 1 January 2015. The following transactions occurred between the two entities:On 1 June 2016, Liala Ltd sold inventory to Jordan Ltd for $12,000, this inventory previously costed Liala Ltd $10,000. By 30 June 2016, Jordan Ltd had sold 20% of this inventory to other entities for $3,000. The other 80% was all sold to external entitiesby 30 June 2017 for $13,000.During the 2016–17 period, Jordan Ltd sold inventory to Liala Ltd for $6,000, this being at cost plus 20% mark-up. Of this inventory, 20 % remained on hand in Liala Ltd at 30 June 2017. The tax rate is 30%.Required:(i)Prepare the consolidation worksheet entries for Liala Ltd at 30 June 2017 in relation to the intragroup transfers of inventory. (ii)Compute the amount of cost of goods sold to be reported in the consolidated income statement for 2017 relating to the relevant intra-group sales.

Answer 1

ANSWER:

(i):

The following are the consolidated worksheet entries to be passed in liala ltd :

(1). UPSTREAM:

30 June 2016 Sales A/c Dr $12,000

To Cost of Goods Sold A/c $12,000

(To eliminate intra entity sales)

Calculation of unrealised Gross profit in inventory as on 30 June 2016

Profit % = 2000/12000 = 16.67%

80% remaining as on 2016

12000x80% = 9,600

Calculation of unrealised profit:

9600 * 16.67% = 1,600

Cost of Goods Sold A/c Dr $1,600

To Inventory A/c $1,600

(To eliminate intra entity gross profit in ending inventory)

As on 30 th June 2017

No elimination of intercompany profit is needed because all of the intercompany profit has been realized through resale of the inventory to the external party during the current period.

(2). DOWNSTREAM:

Calculation of unrealised profit:

20% remined on hand - 6000x20% = $1,200

Unrealised Profit = 1,200x20/120

= $200

Retained Earnings - Bottom A/c $200

To Cost of Goods Sold A/c $200

(ii):

Calculation of Cost of Goods Sold to be reported in consolidated Income Statement:

Cost of Goods Sold of Upstream - $9,600

Add: Cost of Goods sold downstream - $6,000

Less: Unrealised Profit -     $(200)

Cost of Goods sold in consolidated Income Statement: $15,400

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