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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 | Dr | 15 000 |
| Cost of Sales | Cr | 13 000 |
| Inventory | Cr | 2 000 |
| Deferred Tax Asset | Dr | 300 |
| Income Tax Expense | Cr | 300 |
Required
- Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry. (2.5 marks)
- 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)
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