Question

Paused : Question 5 Week 9 (11 marks) (a) Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows: Sales Cost of Sales Inventory Dr15 000 Cr 13 000 Cr 2 000 300 Deferred Tax Asset Dr Income Tax ExpenseCr 300 Required 0) Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry. (2.5 marks) (ii) Determine the consolidation worksheet entries in the following year, assuming the inventory has been-sold, and explain the adjustments on a line-by-line basis. (1.5 marks) (b) On 1 July 2016 Liala Ltd sold an item of plant to Jordan Ltd for $450000 when its' carrying value in Liala Ltd book was $600000 (costs $900000, accumulated depreciation $300000). This plant has a remaining useful life of five (5) years form the date of sale. The group measures its property plants and equipment using a costs model. Tax rate is 30 percent Required: Pass the necessary entries on 30 June 2017 and 30 June 2018 to eliminate the intra-group transfer of equipment. (7 marks) Activate Windows Co to Settings to activate Windows. ENG 1:05 PM

Answer 1

Question 5 : (a)

• A. The accurate entry should be recorded as the following:

Sales Cost of sales Inventory	Dr Cr Cr	15,000	13,500 1,500
Deferred tax asset Income tax expense	Dr Cr	450	450

Sales:   

Recorded sales = $15,000 + $8,000 = $23,000

Group sales = $8,000 (external entity)

Adjustment = $15,000

Cost of sales:

Recorded = $12,000 + ($15,000/2) = $19,500

Group = $12,000/2 = $6,000

Adjustment = $13,500

Inventory:

Recorded = $15,000/2 = $7,500

Group = $12,000/2 = $6,000

Adjustment = $1,500

As inventory in the first adjustment is diminished by $1,500, this changes the holding amount of the asset. A change in the holding amount produces a short-term difference between it and the tax base giving rise to a deferred tax benefit which will be overturned on sale of the asset to an external entity.

• B. If the inventory is on-sold, the accurate entry in the following year is:

Retained Earnings Dr 1050

Income Tax Expense Dr 450

Cost of Sales Cr 1500

Retained Earnings: In the previous cycle, Jessica Ltd recorded an after-tax profit of $2,100 on sale of inventory to Amelie Ltd. Half of this inventory was on-sold to an external entity, making half the profit, $1,050, unrealized. Therefore, the previous cycle profit is decreased by $1,050.

Income tax expense: In the previous cycle, the group created a deferred tax asset of $450. When the inventory is on-sold this year the account is reversed successfully recognizing the deferred tax asset

account and debiting the income tax expense.

Cost of sales:

Recorded = $15,000/2 = $7,500

Group = $12,000/2 = $6,000

Adjustment = $1,500