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ACCT3011 Textbook and Lecture Summaries

ACCT3011 Textbook and Lecture Summaries - ACCT3011...

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ACCT3011 Financial Accounting B Yang Xu (307198650) WEEK 4 SUMMARY – INTRA-GROUP TRANSACTIONS (BORROWING AND INVENTORY) <<WEEK 5 TUTORIAL>> Framework for this week: Intercompany Transactions Covered: (A) Management Service Fees (B) Intra-group Payables/ Receivables (C) Intra-group Borrowing & Lending (D) Intra-group Sales of Inventory Tutorial Questions: Q4.2; E4.1 (a), (b); E4.2 (a),(b),(c) Question 4.2 – Analysis of Intra-Group Sales of Inventory From the perspective of the group, explain what is wrong with simply aggregating the original accounting entries if a subsidiary makes credit sales of inventory to its parent entity during the current accounting period in circumstances where; (a) The total of the relevant sales invoice is $1,200,000; (b) The sales have been made at a mark-up on original cost of 50%; (c) 40% of the inventory remains on hand with the parent entity at period end; and (d) The unpaid sales invoices amount to $300,000 Re-examine last week’s framework. This week we are drilling down further into the consolidation eliminations and adjustments to focus on the elimination of intergroup sales of inventory. We need to consider: a) Eliminating the inter group transaction b) Eliminating unrealised profit in closing inventory c) Eliminating any other related balances on the balance sheet (e.g. accounts payable and receivable). There are several different possibilities and complications: • Inventory in last year’s balance sheet that included unrealised profit which has since been sold externally during this current year • Inventory in last year’s balance sheet that included unrealised profit which has still not been sold externally during this current year • Inventory sold from one Group Company to another this year that is still in this year’s balance sheet that includes unrealised profit • Inventory sold from one Group Company to another this year that has also been sold externally this year • Also, always ask yourself the relevant deferred tax question before you finish – ‘have I done anything in the preceding journal entries that has impacted a taxable asset or liability’? (a) The total of the relevant sales invoice is $1,200,000 Initial entry to record subsidiary purchase: Dr Purchases, Cr Cash Entry to record transfer of purchases to Parent: Dr Cash Cr Sales Revenue Entry to record receipt of purchases from Subsidiary: Dr Purchases, Cr Cash The line by line aggregation is therefore: Purchases: $2,400,000 Cash: $1,200,000 Sales Revenue: $1,200,000 If the accounting entries are aggregated without adjustment there would be an excess of $1,200,000 sales revenue and an excess of $1,200,000 in purchases. An adjustment is therefore required to eliminate this excess. Debit Credit Dr Sales Revenue $1,200,000 Cr Purchases (COGS) $1,200,00 0 Consolidation Adjustment To Eliminate The Intra-Group Sales Revenue of $1,200,000 (b) The sales have been made at a mark-up on original cost of 50%; Assuming that the inventory have not been sold to a third party, the 50% mark up means that $1,200,000 = 150%, Therefore 100% = $800,000. If the sale price is $1,200,000, therefore the difference is the unrealised profit which is $400,000 Page 1 of 6
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