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Tutorial Week 7 Moodle Questions and Solutions

Chapter 17 Consolidated financial statements: intragroup


transactions
REVIEW QUESTIONS
2. In making consolidation worksheet adjustments, sometimes tax-effect entries are
made. Why?
Accounting for tax is governed by AASB 112 Income Tax. Deferred tax accounts are
raised when a temporary difference arises because the tax base of an asset or liability
differs from the carrying amount. Some consolidation adjustments result in changing the
carrying amounts of assets and liabilities. Where this occurs a temporary difference arises
as there is no change to the tax base. In these situations, tax-effect entries, require the
raising of deferred tax assets and liabilities, are necessary.
Consider an example of an item of inventory carried at cost of $10 000 being sold by a
parent to a subsidiary for $12 000, the inventory still being on hand at the end of the
period. The tax rate is 30%.
In the consolidation worksheet there is a credit adjustment to inventory of $2 000 as the
cost to the economic entity differs from that to the subsidiary. In the subsidiarys
accounts, the inventory is carried at $12 000 and has a tax base of $12 000, giving rise to
no temporary differences. From the groups point of view, the asset has a carrying amount
of $10 000, giving a temporary difference of $2 000. As the expected future deduction is
greater than the assessable amount, a deferred tax asset exists for the group.
This has no effect on the amount of tax payable in the current period.

3. Why is it important to identify transactions as current or prior period transactions?


Current period transactions affect different accounts than prior period transactions. For
example, current period sales of inventory affect sales and cost of sales accounts, whereas
prior period sales of inventory affect retained earnings. If the transactions are not correctly
placed into a time context, then the adjustments used for those transactions may be
inappropriate.

4. Where an intragroup transaction involves a depreciable asset, why is depreciation


expense adjusted?
The cost of the asset to the group is different from that recorded by the acquirer of the
depreciable asset within an intragroup transaction. The acquirer records depreciation on
the cost to the acquirer while in the consolidated financial statements, the group wants to
show depreciation calculated on cost to the group. Hence an adjustment is necessary.
If a profit is made on an intragroup sale of a depreciable asset, then the cost of the asset to
the group is less than the cost recorded by the acquirer of the asset. Hence an adjustment
is necessary to reduce the depreciation expense and accumulated depreciation in relation
to the asset.

Tutorial Week 7 Moodle Questions and Solutions

6. What is meant by realisation of profits?


Profit is realised when an entity or an economic entity transacts with another external
entity. For a group or economic entity this is consistent with the concept that the
consolidated financial statements show only the results of transactions with external
entities. The consolidated statement of profit or loss and other comprehensive income will
thus show only realised profits. Profits recognised by group members on sale of assets
within the group are unrealised profits.
With transferred inventory involvement of an external party, or realisation, occurs when
the inventory is on-sold to an external entity.
With transferred depreciable assets, realisation occurs as the asset is used up, as the
benefits are received by the group as a result of use of the asset. The proportion of profits
realised in any one period is measured by reference to the depreciation charged on the
transferred asset.
Profits recorded from intragroup services are considered to be immediately realised.

PRACTICE QUESTIONS
QUESTION 17.1
LAYLA LTD ISABEL LTD
(a)

(b)

(c)

Sales revenue
Cost of sales
Inventory

Dr
Cr
Cr

50 000

Deferred tax asset


Income tax expense

Dr
Cr

750

Retained earnings (1/7/12)


Deferred tax asset
Warehouse

Dr
Dr
Cr

12 600
5 400

Accumulated depreciation
Depreciation expense
Retained earnings (1/7/12)

Dr
Cr
Cr

1 350

Income tax expense


Retained earnings (1/7/12)
Deferred tax asset

Dr
Dr
Cr

270
135

Sales revenue
Cost of sales
Inventory

Dr
Cr
Cr

18 000

Deferred tax asset


Income tax expense

Dr
Cr

600

47 500
2 500

750

18 000

900
450

405

16 000
2 000

600

Tutorial Week 7 Moodle Questions and Solutions


(d)

(e)

(f)

(g)

Retained earnings (1/7/12)


Income tax expense
Sales revenue
Cost of sales
Inventory

Dr
Dr
Dr
Cr
Cr

1 400
600
3 000

Deferred tax asset


Income tax expense

Dr
Cr

150

Dividend payable
Dividend declared

Dr
Cr

5 000

Dividend revenue
Dividend receivable

Dr
Cr

5 000

Debentures
Debentures in Layla Ltd

Dr
Cr

40 000

Interest revenue
Interest expense
(15% x $40 000 x )

Dr
Cr

4 500

Interest payable
Interest receivable
(15% x $40 000 x )

Dr
Cr

1 500

Retained earnings (1/7/11)


Income tax expense
Cost of sales

Dr
Dr
Cr

700
300

4 500
500

150

5 000

5 000

40 000

4 500

1 500

1 000

Tutorial Week 7 Moodle Questions and Solutions

QUESTION 17.8
SUMMER LTD KEIRA LTD

At 1 July 2010:
Net fair value of identifiable assets
and liabilities of Keira Ltd

Consideration transferred
Goodwill

=
=
=

$44 000 + $4 000 (equity)


+ $3 000 (1 30%) (inventory)
+ $10 000 (1 30%) (land)
+ $2 000 (1 30%) (machinery)
$58 500
$60 000
$1 500

1. Business combination valuation entries


Accumulated depreciation
Machinery
Deferred tax liability
Business combination valuation reserve

Dr
Cr
Cr
Cr

20 000

Depreciation expense
Retained earnings (1/7/11)
Accumulated depreciation

Dr
Dr
Cr

400
400

Deferred tax liability


Income tax expense
Retained earnings (1/7/11)

Dr
Cr
Cr

240

Dr
Cr

1 500

Dr
Dr
Dr
Cr

4 000
44 000
12 000

Dr
Dr
Dr
Cr

13 100
44 000
2 900

Goodwill
Business combination valuation reserve

18 000
600
1 400

800

120
120

1 500

2. Pre-acquisition entries
At 1/7/10:
Retained earnings (1/7/10)
Share capital
Business combination valuation reserve
Shares in Keira Ltd

60 000

At 30/6/12:
Retained earnings (1/7/11)*
Share capital
Business combination valuation reserve
Shares in Keira Ltd

60 000

(* = $4000 + $2 100 + $7 000)

Tutorial Week 7 Moodle Questions and Solutions


3. Sales and profit in closing inventory
Sales revenue
Cost of sales
Inventory

Dr
Cr
Cr

17 000

Deferred tax asset


Income tax expense

Dr
Cr

60

Dr
Dr
Cr

280
120

Proceeds on sale of machinery


Carrying amount of machinery sold
Machinery

Dr
Cr
Cr

10 000

Deferred tax asset


Income tax expense

Dr
Cr

150

Accumulated Depreciation - machinery


Depreciation expense

Dr
Cr

50

Income tax expense


Deferred tax asset

Dr
Cr

15

Machinery
Retained earnings (1/7/11)
Deferred tax liability

Dr
Cr
Cr

500

Depreciation expense
Retained earnings (1/7/11)
Accumulated Depreciation

Dr
Dr
Cr

50
25

Deferred tax liability


Income tax expense
Retained earnings (1/7/11)

Dr
Cr
Cr

23

Proceeds on sale of machinery


Carrying amount of machinery sold
Inventory

Dr
Cr
Cr

6 000

Deferred tax asset


Income tax expense

Dr
Cr

300

16 800
200

60

4. Profit in opening inventory


Retained earnings (1/7/11)
Income tax expense
Cost of sales

400

5. Sale of machinery - current period

9 500
500

150

50

15

6. Sale of Machinery: prior period

350
150

75

15
8

7. Sale of plant to inventory

5 000
1 000

300

Tutorial Week 7 Moodle Questions and Solutions

Summer
Ltd
43 000
20 600

Keira
Ltd
52 000
30 900

3 200
5 300
1 200

6 000
2 700
2 600

30 300
12 700
6 000

42 200
9 800
10 000

5 000

9 500

1 000

500

--

13 700
7 400

10 300
4 700

22 300
11 590

Profit
Retained earnings
(1/7/11)

6 300
32 000

5 600
21 000

Retained earnings
(30/6/12)
Share capital
BCVR

38 300

26 600

64 000
--

44 000
--

102 300

70 600

114 383

21 400
-

17 000
-

38 400
487

21 400
123 700

17 000
87 600

Sales revenue
Cost of sales
Selling expenses
Admin expenses
Depreciation

Profit from trading


Proceeds from sale of
machinery
Carrying amount of
machinery sold
Gain/loss on sale of
machinery
Profit before tax
Tax expense

Total equity
Current liabilities
Deferred tax liability
Total liabilities
Total equity and
liabilities

1
6

5
7

Adjustments
Dr
Cr
17 000
16 800
400

400
50

50

Group

3
4

78 000
34 300
9 200
8 000
4 200
55700
22 300
-

10 000
6 000
9 500
5 000

5
7

4
5

120
15

120
60
150
15
300

1
3
5
6
7

1
2
4
6

400
13 100
280
25

120
350
8

1
6
6

10 710
39 673

50 383
2
2

1
6

44 000
2 900

240
23

1 400
1 500

600
150

1
1

1
6

64 000
--

38 887
153 270

Tutorial Week 7 Moodle Questions and Solutions

Machinery
Accumulated
depreciation
Inventory
Shares in Keira Ltd
Receivables
Deferred tax asset

Plant (net)
Goodwill
Total assets

Summer
Ltd
38 000

Keira
Ltd
71 500

(12 200)

(22 300)

19 000

16 400

60 000
5 500
5 400

8 300
6 300

8 000
123 700

7 400
87 600

6
1
5

Adjustments
Dr
Cr
500
18 000
500
20 000
800
50
75
200
1 000
60 000

3
5
7

60
150
300

1 500
117 113

15

Group
91 500

1
5
1
6
3
7
2

(15 325)
34 200
-13 800
12 195

15 400
1 500
153 270

117 113

Tutorial Week 7 Moodle Questions and Solutions

QUESTION 17.14
MONIQUE LTD MADELEINE LTD

At 1 July 2011:
Net fair value of identifiable assets
and liabilities of Madaleine Ltd

Consideration transferred
Goodwill

=
=
=

$80 000 + $16 000 + $21 000 (equity)


+ $1 000 (1 30%) (vehicles)
+ $8 000 (1 30%) (furniture)
+ $6 000 (1 30%) (land)
+ $6 000 (1 30%) (inventory)
$131 700
$137 200
$5 500

The subsidiary would pass the following entry:


Land
Deferred tax liability
Asset revaluation surplus

Dr
Cr
Cr

6 000
1 800
4 200

1.
Business combination valuation entries
At 1 July 2011:
Accumulated depreciation -vehicles
Motor vehicles
Deferred tax liability
Business combination valuation reserve

Dr
Cr
Cr
Cr

3 000

Accumulated depreciation - F&F


Furniture & fittings
Deferred tax liability
Business combination valuation reserve

Dr
Dr
Cr
Cr

6 000
2 000

Goodwill
Business combination valuation reserve

Dr
Cr

5 500

Inventory
Deferred tax liability
Business combination valuation reserve

Dr
Cr
Cr

5 900

2 000
300
700

2 400
5 600

5 500

1 770
4 130

Tutorial Week 7 Moodle Questions and Solutions


At 30 June 2013:
Depreciation expense motor vehicles
Carrying amount of non-current assets sold
Income tax expense
Retained earnings (1/7/12)
Transfer from business combination
valuation reserve

Dr
Dr
Cr
Dr
Cr

125
625

Accumulated depreciation - F&F


Furniture & fittings
Deferred tax liability
Business combination valuation reserve

Dr
Dr
Cr
Cr

6 000
2 000

Depreciation expense
Retained earnings (1/7/12)
Accumulated depreciation F&F

Dr
Dr
Cr

1 000
1 000

Deferred tax liability


Income tax expense
Retained earnings (1/7/12)

Dr
Cr
Cr

600

Dr
Cr

5 500

Dr
Dr
Dr
Dr
Dr
Cr

21 000
80 000
16 000
4 200
16 000

Dr
Dr
Dr
Dr
Cr

29 400
80 000
16 000
11 800

Dr
Cr

700

Goodwill
Business combination valuation reserve

225
175
700

2 400
5 600

2 000

300
300

5 500

2. Pre-acquisition entries
At 1 July 2011:
Retained earnings (1/7/11)
Share capital
General reserve
Asset revaluation surplus
Business combination valuation reserve
Shares in Madaleine Ltd

137 200

At 30 June 2013:
Retained earnings (1/7/12)*
Share capital
General reserve
Business combination valuation reserve
Shares in Madaleine Ltd

137 200

(* $21 000 + ($6 000 - $1 800) (inventory)


+ $4 200 transfer from ARS for land)
Transfer from business combination
valuation reserve
Business combination valuation reserve

700

Tutorial Week 7 Moodle Questions and Solutions

3. Current dividend paid


Dividend revenue
Interim dividend paid

Dr
Cr

2 000

Dividend payable
Final dividend declared

Dr
Cr

3 000

Dividend revenue
Dividend receivable (Other assets)

Dr
Cr

3 000

Dr
Dr
Cr

140
60

Sales revenue
Cost of sales
Inventory

Dr
Cr
Cr

15 000

Deferred tax asset


Income tax expense

Dr
Cr

300

Dr
Dr
Cr

700
300

Accumulated depreciation F&F


Depreciation expense
Retained earnings (1/7/12)

Dr
Cr
Cr

150

Income tax expense


Retained earnings (1/7/12)
Deferred tax asset

Dr
Dr
Cr

30
15

Dr
Cr

10 000

2 000

4. Dividend declared

3 000

3 000

5. Profit in opening inventory


Retained earnings (1/7/12)
Income tax expense
Cost of sales

200

6. Profit in ending inventory

14 000
1 000

300

7.Sale of furniture & fittings


Retained earnings (1/7/12)
Deferred tax asset
Furniture & fittings

1 000

8. Depreciation

100
50

45

9. Advances
Advance from Monique Ltd
Advance to Madaleine Ltd

10 000

10

Tutorial Week 7 Moodle Questions and Solutions

Sales revenue
Other income

Monique Madaleine
Ltd
Ltd
85 000
65 000
23 000
22 000
108 000
65 000

87 000
53 500

Other expenses

22 000

27 000

Profit before tax


Tax expense

87 000
21 000
7 200

80 500
6 500
2 000

Profit
Retained earnings
(1/7/12)

13 800
16 000

4 500
29 500

Transfer from BCVR

-29 800
4 000
10 000
14 000
15 800

-34 000
2 000
3 000
5 000
29 000

170 000
41 000
--

80 000
22 000
--

226 800
120 000

131 000
--

Cost of sales

Dividend paid
Dividend declared
Retrained earnings
(30/6/13)
Share capital
General reserve
Business comb.
valuation reserve
Total equity
Debentures
Def. tax liability
Dividend payable
Current tax liability
Other payables
Advance from
Madaleine Ltd
Total liabilities
Total equity and
liabilities

10 000
8 000
34 800
--

3 000
2 500
10 100
10 000

172 800
399 600

25 600
156 600

6
3
4

1
1
1

Adjustments
Dr
Cr
15 000
2 000
3 000

125
625
1 000

200
14 000
100

Group
135 000
40 000

5
6
8

5
8

60
30

225
300
300

1
1
6

1
1
2
5
7
8
2

175
1 000
29 400
140
700
15
700

300
50

1
8

700

2 000
3 000

3
4

2
2
2

80 000
16 000
11 800

1
4

600
3 000

10 000

5 600
5 500
700

1
1
2

2 400 1

175 000
104 300
50 650

154 950
20 050
8 465

11 585
14 420

-26 005
4 000
10 000
14 000
12 005
170 000
47 000
--

229 005
120 000
1 800
10 000
10 500
44 900
-187 200
416 205

11

Tutorial Week 7 Moodle Questions and Solutions

Monique
Ltd
Shares in Madaleine
Ltd
Land
Motor vehicles
Accumulated
depreciation
Furniture & fittings
Accumulated
depreciation
Inventory
Deferred tax asset
Advance to
Madaleine Ltd
Other assets
Goodwill
Total assets

Madaleine
Ltd

137 200

--

-28 000
(4 000)

24 480
22 000
(2 000)

34 000
(2 000)

37 300
(6 000)

171 580
16 200

70 320
7 400

10 000
8 620
-399 600

Group
Adjustments
Dr

Cr
137 200

--

24 480
50 000
(6 000)
1
1
8

2 000
6 000
150

1 000
2 000

7
1

72 300
(3 850)

6
7

300
300

1 000
45

6
8

240 900
24 155

--

10 000

--

3 100
-156 600

3 000

8 720
5 500
416 205

5 500
189 620

189 620

12

Tutorial Week 7 Moodle Questions and Solutions

MONIQUE LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2013
Revenues:
Sales revenue
Other
Expenses:
Cost of sales
Other
Profit before income tax
Income tax expense
Profit for the period
Comprehensive income for the period

$135 000
40 000
104 300
50 650

$175 000

154 950
20 050
8 465
$11 585
$11 585

MONIQUE LTD
Consolidated Statement of Changes in Equity
for financial year ended 30 June 2013
Comprehensive income for the period
Retained earnings:
Balance at 1 July 2012
Profit for the period
Dividend paid
Dividend declared
Balance at 30 June 2013
Share capital:
Balance at 1 July 2012
Balance at 30 June 2013
General reserve:
Balance at 1 July 2012
Balance at 30 June 2013

$11 585
$14 420
11 585
(4 000)
(10 000)
$12 005
$170 000
$170 000
$47 000
$47 000

13

Tutorial Week 7 Moodle Questions and Solutions

MONIQUE LTD
Consolidated Statement of Financial Position
as at 30 June 2013
ASSETS
Current Assets
Inventories
Non-current Assets
Property, plant and equipment
Land
Furniture and fittings
Accumulated depreciation
Motor vehicles
Accumulated depreciation
Other assets
Goodwill
Tax assets: Deferred tax asset
Total Non-current Assets
Total Assets
EQUITY AND LIABILITIES
Equity
Share capital
General reserve
Retained earnings
Total Equity
Current Liabilities
Dividend payable
Current tax liabilities
Other payables
Total Current Liabilities
Non-current Liabilities:
Deferred tax liabilities
Interest-bearing liabilities: Debentures
Total Non-current Liabilities
Total Liabilities
Total Equity and Liabilities

$240 900

$24 480
$72 300
(3 850)
50 000
(6 000)

68 450
44 000

136 930
8 720
5 500
24 155
175 305
$416 205

$170 000
47 000
12 005
$229 005
10 000
10 500
44 900
65 400
1 800
120 000
121 800
$187 200
$416 205

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