Consolidation week 3
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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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