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Consolidation Week 3. Inter -company transactions. TEXT CHAP 16. Adjustments. Previously stated that there was two major adjustments entries for consolidations :- 1) pre-acquisition entry/revaluation entry

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consolidation week 3
Consolidation Week 3
  • Inter -company transactions

TEXT CHAP 16

adjustments
Adjustments
  • Previously stated that there was two major adjustments entries for consolidations :-

1) pre-acquisition entry/revaluation entry

2) eliminations of intercompany balances & transactions whereby profits or losses are made by different members of the economic entity through trading with each other

intercompany transactions
Intercompany transactions
  • Eliminations of intercompany transactions
  • Transfers of assets
    • sales of inventory
    • sales of depreciable assets
  • Services
  • Dividends (post acquisition)
  • Borrowings

AASB 1024

EFFECT OF TRANSACTIONS

BETWEEN ENTITIES

SHALL BE

ELIMINATED

intercompany sales of inventory
Intercompany sales of inventory
  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.
closing stock adjustment
Closing stock adjustment
  • Assume that on 1 January, H Ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000. Both companies use periodic inventory system .
  • Assume inventory unsold by H Ltd at the end of year
intercompany sales of inventory1
Intercompany sales of inventory
  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.

Entries in S Ltd

Dr Cash 10 000

Cr Sales 10 000

Dr Cost of Sales 8 000

Cr Inventory 8 000

Entries in H Ltd

Dr Inventory 10 000

Cr Cash 10 000

intercompany sales of inventory2
Intercompany sales of inventory

Entries in S Ltd

Dr Cash 10 000

Cr Sales 10 000

Dr Cost of Sales 8 000

Cr Inventory 8 000

Entries in H Ltd

Dr Inventory 10 000

Cr Cash 10 000

  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.

Consolidation entries

Remove internal entries

Dr Sales 10 000

(sales not made external to group)

Cr Cost of Sales 8 000

(not sold external to group)

Cr Inventory 2 000

(shown @ $10 000 actually only $8000)

intercompany sales of inventory3
Intercompany sales of inventory

Consider tax effect of consolidation entry

Reduced carrying amount of the asset :

THEREFORE CREATED a DTD which leads

to a Deferred tax Asset

DR Deferred Tax Asset 600

CR Tax Expense 600

  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.

Consolidation entries

Remove internal entries

Dr Sales 10 000

(sales not made external to group)

Cr Cost of Sales 8 000

(not sold external to group)

Cr Inventory 2 000

(shown @ $10 000 actually only $8000)

adjustment entry for unrealised profit in closing stock
Adjustment entry for unrealised profit in closing stock

DR Sales Revenue (inter-entity sale)

CR Cost of Sales ( inter-entity cost of sales)

CR Inventory (Unrealised profits on opening inventory)

DR Deferred Tax Asset

CR Income Tax Expense

closing stock adjustment1
Closing stock adjustment
  • Assume that on 1 January, H Ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000. Both companies use periodic inventory system .
  • Assume half inventory unsold by H Ltd at the end of year

SAME EXAMPLE

intercompany sales of inventory4
Intercompany sales of inventory

Entries in S Ltd

Dr Cash 10 000

Cr Sales 10 000

Dr Cost of Sales 8 000

Cr Inventory 8 000

Entries in H Ltd

Dr Inventory 10 000

Cr Cash 10 000

  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.

Consolidation entries

Remove internal entries

Dr Sales 10 000

Cr Cost of Sales 9 000

(recorded 8000+5000-4000 what it should be)

Cr Inventory 1 000

(unrealised profit 50%)

Dr Deferred Tax Asset 300

CR Income Tax Expense 300

closing stock adjustment2
Closing stock adjustment
  • Assume that on 1 January, H Ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000. Both companies use periodic inventory system .
  • Assume inventory sold by H Ltd at the end of year

SAME EXAMPLE

intercompany sales of inventory5
Intercompany sales of inventory

Entries in S Ltd

Dr Cash 10 000

Cr Sales 10 000

Dr Cost of Sales 8 000

Cr Inventory 8 000

Entries in H Ltd

Dr Inventory 10 000

Cr Cash 10 000

  • Assume H Ltd owns all the shares of S Ltd & that consolidation is being carried out on 30 June 19x1, for the year ended on that date. Assume also tax rate of 30%.
  • Assume that on 1 January, H ltd purchased $10,000 worth of inventory for cash from S Ltd . The inventory had cost S Ltd $8,000.

Consolidation entries

Remove internal entries

Dr Sales 10 000

Cr Cost of Sales 10 000

No tax entry as no adjustment to

carrying amount of the asset.

opening stock adjustment
Opening stock adjustment
  • Any transferred inventory unsold at the end of one period is still on hand at the beginning of the next period & because consolidation entries are not made in the books, any differences at the end of one period will still exist at the beginning of the next period.
intercompany sales of inventory6
Intercompany sales of inventory

Assume that on 1 July 2000, S Ltd has on hand inventory worth $7000 purchased from P Ltd in June 2000. The Inventory had previously been purchased for $4500.

Tax 30%

intercompany sales of inventory7
Intercompany sales of inventory

Assume that on 1 July 2000, S Ltd has on hand inventory worth $7000 purchased from P Ltd in June 2000. The Inventory had previously been purchased for $4500.

Tax 30%

Consolidation entries 30 June 2000 LAST YEAR

Dr Sales 7 000

Cr Cost of Sales 4 500

Cr Inventory 2 500

Dr Deferred Tax Asset 750

CR Income Tax Expense 750

intercompany sales of inventory8
Intercompany sales of inventory

Assume that on 1 July 2000, S Ltd has on hand inventory worth $7000 purchased from P Ltd in June 2000. The Inventory had previously been purchased for $4500.

Tax 30%

Consolidation entries LAST YEAR

Dr Sales 7 000

Cr Cost of Sales 4 500

Cr Inventory 2 500

Dr Deferred Tax Asset 750

CR Tax Expense 750

Consolidation entries THIS YEAR

DR Retained Profits 2 500

Cr Cost of Sales 2 500

Dr Tax Expense 750

CR Retained Profits 750

(Deferred tax asset is reversed

as Assumed now sold)

opening stock adjustment1
Opening stock adjustment

DR Retained profits ( at begin )

CR Cost of Sales

DR Income tax expense

CR Retained profits (at begin)

intercompany sales of depreciable assets
Intercompany sales of depreciable assets
  • Sale
      • Intercompany profit or loss on the sale of an asset has to be eliminated - i.e. we reduce the sale price of the asset to its book value
  • dr Proceeds of Sale

cr Carrying Amount of Asset

cr Asset

dr Deferred Tax Asset

cr Tax expense

  • n.b. :: entries when there is a loss
  • dr Proceeds of Sale

cr Carrying Amount of Asset

dr Asset

drTax Expense

cr Deferred Tax Liability

intercompany sales of depreciable assets1
Intercompany sales of depreciable assets
  • Consider depreciation

Depreciation should be adjusted to the depreciation on the book value - currently sale price

DR ACCUMULATED DEPRECIATION

CR DEPRECIATION

DR INCOME TAX EXPENSE

CR DEFERRED TAX ASSET

example depreciable asset
Example - depreciable asset
  • Assume H Ltd sold to S Ltd a motor vehicle for $18,500 cash at 1 July 19x0. It had cost H Ltd $20,000 one year ago. Depreciation charged by H Ltd is at 10% per annum on cost and S Ltd applies a rate of 6% on cost.
example depreciable asset1
Example - depreciable asset
  • Assume H Ltd sold to S Ltd a motor vehicle for $18,500 cash at 1 July 19x0. It had cost H Ltd $20,000 one year ago. Depreciation charged by H Ltd is at 10% per annum on cost and S Ltd applies a rate of 6% on cost.

IN THE BOOKS ::

H LTD PURCHASED $20,000

DEPN (10%) 2,000

B.V. $18,000

SOLD 18,500

GAIN ON SALE $ 500

example depreciable asset2
Example - depreciable asset
  • Assume H Ltd sold to S Ltd a motor vehicle for $18,500 cash at 1 July 19x0. It had cost H Ltd $20,000 one year ago. Depreciation charged by H Ltd is at 10% per annum on cost and S Ltd applies a rate of 6% on cost.

CONSOLIDATION ADJ.

DR Proceeds on Sale 18 500

CR Carrying Amt 18 000

CR M.V. 500

DR Deferred Tax Asset 150

CR Tax Expense 150

example depreciable asset3
Example - depreciable asset
  • Assume H Ltd sold to S Ltd a motor vehicle for $18,500 cash at 1 July 19x0. It had cost H Ltd $20,000 one year ago. Depreciation charged by H Ltd is at 10% per annum on cost and S Ltd applies a rate of 6% on cost.

CONSOLIDATION ADJ.

DR Acc. Depn 30

CR Depn Exp 30

(6% $500 )

DR Tax Expense 9

CR Deferred Tax Asset 9

example depreciable asset4
Example - depreciable asset
  • Assume H Ltd sold to S Ltd a motor vehicle for $18,500 cash at 1 July 19x0. It had cost H Ltd $20,000 one year ago. Depreciation charged by H Ltd is at 10% per annum on cost and S Ltd applies a rate of 6% on cost.

SUBSEQUENT YEAR

DR R.P. ( Begin) 500

CR M.V. 500

DR Def Tax Asset 150

CR R.P. (Begin) 150

DR Acc. Depn 60

CR Depn Exp 30

CR R.P. (Begin) 30

DR Tax Exp 9

DR R.P. (Begin) 9

CR Def Tax Asset 18

RP= RETAINED PROFITS

CONSOLIDATION ADJ.

DR Proceeds on Sale 18 500

Cr Carrying Amount 18 000

CR M.V. 500

DR Deferred Tax Asset 150

CR Tax Expense 150

DR Acc. Depn 30

CR Depn Exp 30

(6% $500 )

DR Tax Expense 9

CR Deferred Tax Asset 9

intercompany services
Intercompany services
  • During the year H Ltd offered the services of a specialist employee to S Ltd in return for which S Ltd paid $25,000 to H Ltd.
intercompany services1
Intercompany services
  • During the year H Ltd offered the services of a specialist employee to S Ltd in return for which S Ltd paid $25,000 to H Ltd.

ENTRY

DR SERVICES REVENUE 25,000

CR SERVICES PAID 25,000

post acquisition dividends
Post acquisition dividends
  • Dividends declared but not paid

Entries in the books

    • Subsidiary

DR Dividend Provided (Retained Profits) 25 000

CR Provision for Dividend 25 000

    • Holding Coy

Dr Dividend Receivable 25 000

Cr Dividend Revenue 25 000

post acquisition dividends1
Post acquisition dividends
  • Dividends declared but not paid

Entries in the books

    • Subsidiary

DR Dividend Provided (Retained Profits)

CR Provision for Dividend

    • Holding Coy

Dr Dividend Receivable

Cr Dividend Revenue

CONSOLIDATION ENTRIES

DR Provision for Dividend 25,000

CR Dividend Provided 25,000

DR Dividend Revenue 25,000

Cr Dividend Receivable 25,000

post acquisition dividends2
Post acquisition dividends
  • Dividends declared and paid

Entries in the books

    • Subsidiary

DR Dividend Paid - retained profits 4 000

CR Cash 4 000

    • Holding Coy

Dr Cash 4 000

Cr Dividend Revenue 4 000

post acquisition dividends3
Post acquisition dividends
  • Dividends declared and paid

Entries in the books

    • Subsidiary

DR Dividend Paid - retained profits 4 000

CR Cash 4 000

    • Holding Coy

Dr Cash 4 000

Cr Dividend Revenue 4 000

CONSOLIDATION ENTRIES

DR Dividend Revenue 4 000

CR Dividend Paid 4 000

intercompany borrowings
Intercompany borrowings
  • H Ltd lends S Ltd $1,000 the latter paying $50 interest
intercompany borrowings1
Intercompany borrowings
  • H Ltd lends S Ltd $1,000, the latter paying $50 interest

ENTRY::

DR S LTD 1,000

CR H LTD 1,000

DR INT REVENUE 50

CR INT PAID 50

intercompany borrowings2
Intercompany borrowings
  • One type of intercompany borrowing is the issue of debentures

Assume that on 1 January 19x0, H Ltd issues 1,000 $100 debentures having interest of 15% per annum payable on 1 January each year. S Ltd its subsidiary acquires half of the debentures issued.

intercompany borrowings3
Intercompany borrowings
  • One type of intercompany borrowing is the issue of debentures

Assume that on 1 January 19x0, H Ltd issues 1,000 $100 debentures having interest of 15% per annum payable on 1 January each year. S Ltd its subsidiary acquires half of the debentures issued.

ENTRY::

DR DEBENTURES 50,000

CR DEBENTURES IN H LTD 50,000

DR INTEREST REVENUE 7,500

CR INTEREST EXPENSE 7,500

tutorial questions
Tutorial questions
  • Exercise 16.1
  • Exercise 16.5
  • Problem 16.2
  • Problem 16.4
  • Problem 16.5
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