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1 Topic 7: HOMEWORK SOLUTION (CH.20) Chapter 20 Consolidation: intragroup transactions Review Question 1 - consolidation entries for intragroup transactions Why is it necessary to make adjustments for intragroup transactions? The consolidated financial statements are the statements of the group, an economic entity consisting of the parent and its subsidiaries. The consolidated financial statements then can only contain income, expenses, profits, share capital, assets and liabilities that relate to parties external to the group . Adjustments must then be made for intragroup transactions as these are internal to the economic entity , and do not reflect the effects of transactions with external parties. This is also consistent with the entity concept of consolidation, which defines the group as the net assets of the parent and the net assets of the subsidiary. Transactions between these parties must then be adjusted in full as both parties are within the economic entity. Examples of intragroup transactions where adjustments are needed include: 1. Services provided between entities during current period – e.g. rent, management fees 2. Dividends received or receivable by the parent entity from a subsidiary 3. Outstanding loan balances between entities at period end together with any interest on the loans for the current period 4. Sales of goods between entities during the current period together with any unrealised profit in closing inventory 5. Unrealised profit in opening inventory from prior period sales of goods between entities 6. Outstanding balances of receivables and payables between entities at period end that relate to sales of goods or services 7. Gain or loss on transfer of a non-current asset between entities during the current period or prior period 8. Depreciation adjustments on plant or equipment transferred between entities at a gain or loss Business School ACCT5942 Corporate Accounting and Regulation Sem1, 2017
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2 Pro-forma consolidation journals entries for intragroup transactions and balances 1. For intra-group services in current period, e.g. rent Rent revenue Dr Rent expense Cr 2. (a) Dividend declared and paid in current period Dividend revenue Dr Dividend paid Cr (b) Dividend declared and payable at end of current period Dividend payable Dr Dividend receivable Cr Dividend revenue Dr Dividend declared Cr 3. (a) Outstanding loan balances at end of current period Loan payable Dr Loan receivable Cr (b) Outstanding debentures at end of the current period Debentures issued Dr Investment in debentures Cr (c) Interest for the current period Interest revenue Dr Interest expense Cr 4. (a) Sale of inventory at no profit during current period Sales revenue Dr Cost of sales Cr (b) Sale of inventory at profit during current period with inventory on hand at end of the period Sales revenue Dr Cost of sales Cr Cost of sales Dr Inventory Cr Deferred tax asset Dr Income tax expense Cr
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3 5. Sale of inventory at profit during previous period with inventory on hand at beginning of period
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