Consolidation Week 3
Inter -company transactions
TEXT CHAP 16TEXT CHAP 16
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
Eliminations of intercompany transactions
Transfers of assets
� sales of inventory
� sales of depreciable assets Services Dividends (post acquisition) Borrowings
AASB 1024EFFECT OF TRANSACTIONS
BETWEEN ENTITIESSHALL BE
ELIMINATED
AASB 1024EFFECT OF TRANSACTIONS
BETWEEN ENTITIESSHALL BE
ELIMINATED
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
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 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 LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Entries in S LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
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.
Consolidation entriesRemove internal entriesDr 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)
Consolidation entriesRemove internal entriesDr 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)
Entries in S LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Entries in S LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
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.
Consider tax effect of consolidation entryReduced carrying amount of the asset :THEREFORE CREATED a DTD which leadsto a Deferred tax AssetDR Deferred Tax Asset 600 CR Tax Expense 600
Consider tax effect of consolidation entryReduced carrying amount of the asset :THEREFORE CREATED a DTD which leadsto a Deferred tax AssetDR Deferred Tax Asset 600 CR Tax Expense 600
Consolidation entriesRemove internal entriesDr 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)
Consolidation entriesRemove internal entriesDr 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
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 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 EXAMPLESAME EXAMPLE
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 LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Entries in S LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Consolidation entriesRemove internal entriesDr Sales 10 000Cr 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
Consolidation entriesRemove internal entriesDr Sales 10 000Cr 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 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 EXAMPLESAME EXAMPLE
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 LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Entries in S LtdDr Cash 10 000 Cr Sales 10 000Dr Cost of Sales 8 000 Cr Inventory 8 000Entries in H LtdDr Inventory 10 000 Cr Cash 10 000
Consolidation entriesRemove internal entriesDr Sales 10 000Cr Cost of Sales 10 000
No tax entry as no adjustment to carrying amount of the asset.
Consolidation entriesRemove internal entriesDr Sales 10 000Cr Cost of Sales 10 000
No tax entry as no adjustment to carrying amount of the asset.
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 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 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 YEARDr Sales 7 000Cr Cost of Sales 4 500Cr Inventory 2 500 Dr Deferred Tax Asset 750 CR Income Tax Expense 750
Consolidation entries 30 June 2000 LAST YEARDr Sales 7 000Cr Cost of Sales 4 500Cr Inventory 2 500 Dr Deferred Tax Asset 750 CR Income Tax Expense 750
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 YEARDr Sales 7 000Cr Cost of Sales 4 500Cr Inventory 2 500 Dr Deferred Tax Asset 750 CR Tax Expense 750
Consolidation entries LAST YEARDr Sales 7 000Cr Cost of Sales 4 500Cr Inventory 2 500 Dr Deferred Tax Asset 750 CR Tax Expense 750
Consolidation entries THIS YEARDR Retained Profits 2 500Cr Cost of Sales 2 500 Dr Tax Expense 750 CR Retained Profits 750(Deferred tax asset is reversedas Assumed now sold)
Consolidation entries THIS YEARDR Retained Profits 2 500Cr Cost of Sales 2 500 Dr Tax Expense 750 CR Retained Profits 750(Deferred tax asset is reversedas Assumed now sold)
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
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 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
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 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 $20,000DEPN (10%) 2,000B.V. $18,000
SOLD 18,500GAIN ON SALE $ 500
IN THE BOOKS ::H LTD PURCHASED $20,000DEPN (10%) 2,000B.V. $18,000
SOLD 18,500GAIN ON SALE $ 500
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
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 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
CONSOLIDATION ADJ.
DR Acc. Depn 30 CR Depn Exp 30(6% $500 )
DR Tax Expense 9 CR Deferred Tax Asset 9
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 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
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
SUBSEQUENT YEARDR 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 9DR R.P. (Begin) 9 CR Def Tax Asset 18RP= RETAINED PROFITS
SUBSEQUENT YEARDR 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 9DR R.P. (Begin) 9 CR Def Tax Asset 18RP= RETAINED PROFITS
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 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
ENTRY
DR SERVICES REVENUE 25,000 CR SERVICES PAID 25,000
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 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 25,000DR Dividend Revenue 25,000 Cr Dividend Receivable 25,000
CONSOLIDATION ENTRIES
DR Provision for Dividend 25,000 CR Dividend Provided 25,000DR Dividend Revenue 25,000 Cr Dividend Receivable 25,000
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 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
CONSOLIDATION ENTRIES
DR Dividend Revenue 4 000 CR Dividend Paid 4 000
Intercompany borrowings
H Ltd lends S Ltd $1,000 the latter paying $50 interest
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
ENTRY::
DR S LTD 1,000 CR H LTD 1,000
DR INT REVENUE 50 CR INT PAID 50
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 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
Exercise 16.1 Exercise 16.5 Problem 16.2 Problem 16.4 Problem 16.5