Topic08_PracticeQuestions - 1 Week 5 18 Jan. (DM) Lecture...

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1 Week 5 18 Jan. (DM) Lecture Topic 8 Consolidation: Intra-group transactions Prepare consolidated journal entries for: o Intra-group sale of inventory o Unrealised profit in opening inventory o Unrealised profit in closing inventory o Intra-group transfer and unrealised profit in plant including excess depreciation o Intra-group borrowings and interest o Inter-company dividends (pre and post acq) Prepare comprehensive consolidation worksheet Practice Questions: Picker et al, Ch. 24 DQ2, DQ3, DQ4, DQ6 Exercise 24.4 Exercise 24.8 Problem 24.3 Chapter 24 – Consolidation: intragroup transactions DISCUSSION QUESTIONS 2. In making consolidation worksheet adjustments, sometimes tax-effect entries are made. Why? Accounting for tax is governed by AASB 112 Income Tax . Deferred tax accounts are raised when a temporary difference arise because the tax base of an asset or liability differs from the carrying amount. Some consolidation adjustments result in changing the carrying amounts of assets and liabilities. Where this occurs a temporary difference arises as there is no change to the tax base. In these situations, tax-effect entries, requiring the raising of deferred tax assets and liabilities, are necessary. Consider an example of an item of inventory carried at cost of $10 000 being sold by a parent to a subsidiary for $12 000, the inventory still being on hand at the end of the period. The tax rate is 30%. In the consolidation worksheet there is a credit adjustment to inventory of $2000 as the cost to the economic entity differs from that to the subsidiary. In the subsidiary’s accounts, the inventory is carried at $12 000 and has a tax base of $12000, giving rise to no temporary differences. From the group’s point of view, the asset has a carrying amount of $10 000, giving a temporary difference of $2000. As the expected future deduction is greater than the assessable amount, a deferred tax asset exists for the group. This has no effect on the amount of tax payable in the current period.
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2 3. Why is it important to identify transactions as current or prior-period transactions? Current period transactions affect different accounts than prior-period transactions. For example, current period sales of inventory affect sales and cost of sales accounts; whereas, prior-period sales of inventory affect retained earnings. If the transactions are not correctly placed into a time context, then the adjustments used for those transactions may be inappropriate. 4. Where an intragroup transaction involves a depreciable asset, why is depreciation expense adjusted? The cost of the asset to the group is different from that recorded by the acquirer of the depreciable asset within an intragroup transaction. The acquirer records depreciation on the cost to the acquirer while, in the consolidated financial statements, the group wants to show depreciation calculated on cost to the group. Hence an adjustment is necessary.
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This note was uploaded on 01/19/2012 for the course ACCT 2542 taught by Professor Knapp during the Three '11 term at University of New South Wales.

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Topic08_PracticeQuestions - 1 Week 5 18 Jan. (DM) Lecture...

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