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Lecture 8 Consolidation Intragroup Transactions

Lecture 8 Consolidation Intragroup Transactions - Chapter...

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7/11/2011 1 Chapter 24 Chapter 24 Consolidation: intragroup transactions Prepared by Emma Holmes Rationale for adjusting intragroup transactions Intragroup transactions - transactions that occur between entities in the group The financial effects must be eliminated on consolidation because, from a group viewpoint, they are not relevant AASB 127 requires intragroup balances, transactions, income and expenses to be eliminated in full AASB127 also requires tax effect accounting to be applied where temporary differences arise due to the elimination of profits and losses The broad effect of intragroup sales and purchases of inventory can be illustrated by reference to the diagram below Transfers of inventory P t P h Sells inventory Subsidiary Parent Purchases inventory for $100 on 1 June 2009 for $150 on 25 June 2009 All inventory still held by the parent at 30 June 2009
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7/11/2011 2 The subsidiary would record sales of $150 and COGS of $100 - recognising a profit of $50 The parent would record inventory of $150, despite the fact that this inventory cost the group $100 The $50 profit made by the subsidiary is considered to be Unrealised profit in ending inventory The $50 profit made by the subsidiary is considered to be unrealised at 30 June 2009, as the inventory is yet to be sold to an external party To determine how to eliminate the effects of this transaction it is helpful to consider the journal entries that would have been recorded in the subsidiary and parent’s books respectively The journal entries processed by each entity and the consolidation journal adjustments required are shown on the following slides Subsidiary Parent 1 June 2009 Dr Inventory 100 Cr A/C Payable 100 Unrealised profit in ending inventory 25 June 2009 Dr Cash 150 Dr Inventory 150 Cr Sales 150 Cr Cash 150 Dr COGS 100 Cr Inventory 100 Dr ITE 15 Cr CTL 15 (i) Eliminate intragroup sale Dr Sales 150 Cr COGS 150 (ii) Eliminate unrealised profit and adjust overstated inventory Unrealised profit in ending inventory Consolidation journal adjustments are required at 30 June 2009 for the following: Note: Transactions (i) and (ii) can be combined into a single entry as follows: Dr Sales 150 Cr COGS 100 Cr Inventory 50 Dr COGS 50 Cr Inventory 50 From a consolidated viewpoint, there is NO sale, NO COGS (and therefore no profit). In addition, inventory must be shown at the cost to the group (i.e. $100 not $150) (iii) Recognise tax effect of profit elimination Dr DTA 15 Cr ITE 15 No profit and therefore no tax expense, from group viewpoint. In future, when inventory sold by parent the group will recognise the tax expense
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