Topic_9_Tutorials.pptx - MAA716 Financial Accounting Topic...

MAA716 Financial Accounting
Topic 9 – Chapter 26
Tutorials
Consolidation - Accounting for Intragroup
Transactions

Question 26.7
A Ltd owns 100 per cent of B Ltd, which in turn owns 100 per cent of C Ltd. During the financial year, A Ltd
sells inventory to B Ltd at a sale price of $150 000. The inventory cost A Ltd $100 000 to produce.
Within the same financial year, B Ltd subsequently sells the same inventory to C Ltd for $200 000 without
incurring any additional costs. At the end of the financial year, C Ltd has sold half of this inventory to
companies outside the group for a sale price of $180 000. At year end C Ltd still has half the stock on hand.
REQUIRED
From the economic entity’s perspective (that is, the group’s perspective), determine:
(a)the sales revenue for the financial year
(b)the value of closing inventory.

(a)The only revenue that should be shown in the consolidated financial
statements of the economic entity is the revenue that relates to sales
external to the entity. In this case, the sales revenue for the financial
year from the economic entity’s perspective would be $180 000, as
shown diagrammatically below.
$150 000
A Ltd
B Ltd
C Ltd
external sales
$200 000
$180 000
economic entity

(b) Inventory must be valued at the lower of cost and net-
realisable value. From the economic entity’s perspective, the
inventory cost $100 000 to produce. As half of this inventory is
on hand at the end of the reporting period, the value of
inventory for the purposes of the consolidated financial
statements is $50 000.

Challenging Question 26.13
The following financial statements of Andy Ltd and its subsidiary Irons Ltd have been extracted from their financial records at 30 June 2019.
Andy Ltd ($) Irons Ltd($)
Reconciliation of opening and closing retained earnings:
Sales revenue 839 250 725 000
Cost of goods sold (580 000) (297 500)
Gross profit 259 250 427 500
Dividends received from Irons Ltd 116 250 ---
Management fee revenue 33 125 ---
Gain on sale of plant 43 750 ---
Expenses:
Administrative expenses (38 500) (48 375)
Depreciation (30 625) (71 000)
Management fee expense --- (33 125)
Other expenses(126 375) (96 250)
Profit before tax 256 875 178 750
Tax expense 76 875 52 750
Profit for the year 180 000 126 000
Retained earnings—30 June 2018 399 250 299 000
579 250 425 000
Dividends paid (171 750) (116 250)
Retained earnings—30 June 2019 407 500 308 750

Statement of financial position
Andy Ltd ($) Irons Ltd($)
Shareholders’ equity:
Retained earnings 407 500 308 750
Share capital 437 500 250 000
Current liabilities
Accounts payable – 57 875
Tax payable 100 000 31 250
Non-current liabilities
Loans 236 000 145 000
Total L. & S.E. 1 181 000 792 875
Current assets:
Accounts receivable 74 250 77 875
Inventory115 000 36 250
Non-current assets:
Land and buildings198 750 407 500
Plant—at cost 400 000 444 750
Accumulated depreciation (107 000) (173 500)
Investment in Irons Ltd 500 000 ----
Total Assets 1 181 000 792 875