Question

Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows:

Required
Sales
Cost of Sales Inventory
Dr15 000
Cr 13 000 Cr 2 000
DeferredTaxAsset Dr 300 Income Tax ExpenseCr 300
(i) Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry.
(ii)Determine the consolidation worksheet entries in the following year, assuming the inventory has been –sold, and explain the adjustments on a line-by-line basis.
(b) On 1 July 2016 Liala Ltd sold an item of plant to Jordan Ltd for $450000 when its’ carrying value in Liala Ltd book was $600000 (costs $900000, accumulated depreciation $300000). This plant has a remaining useful life of five (5) years form the date of sale. The group measures its property plants and equipment using a costs model. Tax rate is 30 percent.
Required:
Pass the necessary entries on 30 June 2017 and 30 June 2018 to eliminate the intra-group transfer of equipment.

Answer 1

The suggested consolidation adjustment entries by Li Chen, the group accountant, are not correct. The correct adjustment entry for the inventory sales should be to increase the Cost of Sales by $1,000 and decrease the Inventory by $3,000. The correct entry for the Deferred Tax Asset and Income Tax Expense should be to increase them both by $900.

Step-by-step explanation:

In this scenario, the student is asking about the appropriate consolidation adjustment entries for an intercompany transaction involving inventory sales. The suggested entries by Li Chen, the group accountant, are not correct. Here is the correct adjustment entry:

1. Li Chen's Entry:

   Sales: $15,000

   Cost of Sales: $13,000

   Inventory: $2,000

   Correct Entry:

   Sales: $15,000

   Cost of Sales: $12,000

   Inventory: $3,000

2. Li Chen's Entry:

   Deferred Tax Asset: $300

   Income Tax Expense: $300

   Correct Entry:

   Deferred Tax Asset: $900

   Income Tax Expense: $900

Regarding the consolidation worksheet entries in the following year, assuming the inventory has been sold, I would need more information to provide a line-by-line explanation. However, please note that any remaining inventory would need to be adjusted for its carrying amount for the next period.