Accounting for intragroup transactions | My Assignment Tutor

Lecture 7 : Accounting for intragroup transactionsHI5020 Corporate AccountingHolmes InstituteApplied Business Statistics for ManagersTopics covered in this session:▪ Understand the nature of intragroup transactions▪ Understand how and why to eliminate intragroup dividends onconsolidation▪ Understand how to account for intragroup sales of inventoryinclusive of the related tax expense effects▪ Understand how to account for intragroup sales of non-currentassets inclusive of the related tax expense effectsHolmes InstituteApplied Business Statistics for ManagersIntroduction to accounting for consolidation issues▪ It is common for separate legal entities within an economicentity to transact with each other▪ In preparing consolidated financial statements:intragroup balances, transactions, income and expensesshall be eliminated in fullHolmes InstituteApplied Business Statistics for ManagersExamples of intragroup transactions▪ Payment of dividends to group members▪ Payment of management fees to a group member▪ Intragroup sales of inventory▪ Intragroup sales of non-current assets▪ Intragroup loansHolmes InstituteApplied Business Statistics for ManagersConsolidation adjustments for intragrouptransactions▪ Typically eliminate these transactions by reversing theoriginal accounting entries made to recognise thetransactions in the separate legal entitiesNote▪ Consolidation journal entries are not written in the journals ofeither company but are entered in a separate consolidationjournalHolmes InstituteApplied Business Statistics for ManagersDividend payments from post-acquisitionearningsDividend payments▪ In the consolidation process it is necessary to eliminate:➢ all dividends paid/payable to other entities within the group➢ all dividends received/receivable from other entities within the group▪ Only dividends paid externally should be shown in the consolidated financialstatementsHolmes InstituteApplied Business Statistics for ManagersDividend payments-Journal EntriesTo eliminate dividends payable:Dr Dividends payable (statement of financial position)Cr Dividends declared (statement of changes in equity)To eliminate dividends receivableDr Dividend income (statement of P&L and OCI)Cr Dividend receivable (statement of financial position)Holmes InstituteApplied Business Statistics for ManagersIntragroup sale of inventory▪ From the group’s perspective, revenue should not be recogniseduntil inventory is sold to parties outside the group▪ We will need to eliminate any unrealised profits from theconsolidated financial statements▪ Unrealised profits result from inventory, which is sold within thegroup for a profit, remaining on hand within the group at the endof the periodHolmes InstituteApplied Business Statistics for ManagersExample of intragroup sale of inventoryLet us assume that Company A controls Company B and:▪ Company A sells $200 000 of inventory to Company B (seediagram next slide)▪ Company B in turn sells the inventory to an externalorganisation, Company C, for $350 000What total amount of sales should be recorded in theconsolidated financial statements?Holmes InstituteApplied Business Statistics for ManagersIntragroup sale of inventory-tax implications▪ Each member of a group is typically taxed individually on itsincome, not the group collectively▪ If tax has been paid by one member of the group, from thegroup’s perspective this represents a prepayment of tax(deferred tax asset) to the extent that the inventory remainswithin the group-due to unrealised profit▪ This income will not be earned by the economic entity untilthe inventory is sold outside the groupHolmes InstituteApplied Business Statistics for ManagersIntragroup sale of inventory-journals▪ Journal entry to eliminate inter-company sales DrCrSalesCost of goods soldxx ▪ Journal entry to eliminate unrealised profit in closing stock DrCost of goods soldxCrInventoryx▪ Consideration of tax paid on intragroup sale of inventoryDrDeferred tax assetxCrIncome tax expensex Holmes InstituteApplied Business Statistics for ManagersExample 26.3—Unrealised profit in closing inventory▪ Big Ltd owns 100 per cent of the shares of Little Ltd▪ These shares are acquired on 1 July 2022▪ During the 2023 financial year, Little Ltd sells inventory to BigLtd at a sales price of $200 000. The inventory cost Little Ltd$120 000 to produce▪ At 30 June 2023, half of the stock is still on hand with Big Ltd.The tax rate is assumed to be 33 per centHolmes InstituteApplied Business Statistics for ManagersExample 26.3—Unrealised profit in closing inventory▪ Elimination of intragroup sales DrSales200 000CrCost of goods sold200 000▪ Elimination of unrealised profit in closing inventoryCost of goods sold40 000CrInventory40 000 ▪ Consideration of the tax paid on the sale of inventory that is still heldwithin the groupDr Deferred tax asset 13 200Cr Income tax expense 13 200($40 000 × 33%)Holmes InstituteApplied Business Statistics for ManagersUnrealised profit in opening inventoryReducing opening inventory reduces cost of goods sold DrOpening retained earningsxCrCost of goods soldxHigher profits lead to higher tax expenseDrIncome tax expensexCrOpening retained earningsx Holmes InstituteApplied Business Statistics for ManagersUnrealised profit in opening inventory-continued▪ Eliminating unrealised profit in opening inventory DrOpening retained earnings—1 July 202340 000CrCost of goods sold40 000 Consideration of the tax on the sale of inventory held withinthe group at the beginning of the reporting period DrIncome tax expense13 200CrRetained earnings—1 July 202313 200 Holmes InstituteApplied Business Statistics for ManagersSale of non-current assets within the group▪ Assets of the group need to be valued as if the intragroupsale had not occurred▪ Need to reinstate the non-current asset to the original cost or revalued amount➢ Eliminate any unrealised profits on sale➢ Adjust depreciation➢ There may be tax on profit of sale, which will represent a temporarydifference in the consolidated financial statementsHolmes InstituteApplied Business Statistics for ManagersSale of non-current assets within the group-Journal EntryReversing gain and reinstating accumulated depreciation DrDrCrGain on saleAssetAccumulated depreciationxxx Recognising deferred tax asset DrCrDeferred tax assetIncome tax expensexx Adjusting depreciation to reflect correct amount DrCrAccumulated depreciationDepreciation expensexx Partially reversing deferred tax asset to reflect depreciation adjustment DrCrIncome tax expenseDeferred tax assetxx Holmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset▪ On 1 July 2022 Eddie Ltd acquired a 100 per cent interest inSandy Ltd▪ On 1 July 2022 Eddie Ltd sells an item of plant to Sandy Ltdfor $780 000▪ This plant cost Eddie Ltd $1 million, is four years old and hasaccumulated depreciation of $400 000 at the date of the sale▪ The remaining useful life of the plant is assessed as six years▪ The tax rate is 30 per centHolmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset-continued▪ Workings:▪ The result of the sale of the item of plant to Sandy Ltd is thatthe gain of $180 000—the difference between the salesproceeds of $780 000 and the carrying amount of $600 000—will be shown in Eddie Ltd’s financial statementsHolmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset-continued▪ From Eddie Ltd’s individual perspective it would have made again of $180 000 on the sale of the plant and this gain wouldhave been taxable.▪ At a tax rate of 30 per cent, $54 000 would be payable in taxby Eddie Ltd and $54 000 would similarly have been includedin the income tax expense account.Holmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset-continued▪ Working▪ Sandy Ltd would be depreciating the asset on the basis of thecost it incurred to acquire the asset. Its depreciation chargewould be $780 000 ÷ 6 = $130 000▪ From the economic entity’s perspective, the asset had acarrying value of $600 000, which was to be allocated overthe next six years, giving a depreciation charge of $600 000 ÷6 = $100 000. An adjustment of $30 000 is therefore required.Holmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset-continued▪ The increase in the tax expense from the perspective of theeconomic entity is due to the reduction in the depreciationexpense▪ This entry represents a partial reversal of the deferred taxasset of $54 000 recognised in the earlier entry. After sixyears the balance of the deferred tax asset relating to thesale of the item of plant will be $nilHolmes InstituteApplied Business Statistics for ManagersExample 26.5—Intragroup sale of a non-current asset-continuedReversing gain and reinstating accumulated depreciation DrGain on sale of Plant180 000DrPlant220 000CrAccumulated depreciation400 000 Recognising deferred tax asset DrDeferred tax asset54 000CrIncome tax expense54 000 Adjusting depreciation to reflect correct amount DrAccumulated depreciation30 000CrDepreciation expense30 000 Partially reversing deferred tax asset to reflect depreciation adjustment DrIncome tax expense9 000CrDeferred tax asset9 000 Holmes InstituteApplied Business Statistics for ManagersComprehensive example▪ Zealandia ltd is the parent company holding 90 percent interest in the Oceania ltd. Foreach of the following independent cases, provide adjusting entries necessary toeliminate the effect of intragroup transaction at 30 June 2020:▪ During the period Oceania Ltd sold inventory to Zealandia Ltd at a price of $240000.The cost of the inventory to Oceania ltd was $168000. Ninety percent (90%) of theinventory has been sold by Zealandia Ltd to outside third parties by the end of theperiod.▪ During the period, Oceania borrowed $1500000 from Zealandia Ltd which is stillunpaid by the end of the period. During the period Oceania Ltd has paid $30000interest to Zealandia Ltd for the borrowing.▪ At the end of the year, Oceania Ltd declared and paid a dividend amounting to$180000. Zealandia Ltd has declared and paid a dividend of $150000.▪Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued▪ One year ago, at 1 July 2019, Oceania Ltd sold equipment to Zealandia Ltd for a priceof $810000. At the time of the sale, the carrying value of the equipment in the OceaniaLtd.’s account was $450000 and the accumulated depreciation was $450000.Zealandia is depreciating the equipment over a further 5 years period. The expectedsalvage value is zero. Assume a corporate tax rate of 30 percent.▪ During the period Zealandia has paid a consultancy fee to Oceania Ltd of $75000.Zealandia has provided a management service to Oceania Ltd for $80000 which hasnot been paid as yet by Oceania Ltd.Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued(i) Sales Dr $240000Cost of goods sold Cr 240000Cost of goods sold Dr 7200Inventory Cr 7200Deferred Tax Assets Dr 2160Income tax expense Cr 2160Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued(ii) Loan payable Dr 1500000Loan Receivable Cr 1500000 Interest IncomeDr30000Interest ExpenseCr30000 Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued(iii) Dividend income Dr 162000 (180000*90%)Dividend Paid Cr 162000(No entry is needed for dividend declared and paid by theparent company because it is not an intra-group transaction.)Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued(iv)Gain on sale of equipment Dr 360000Equipment Dr 90000Accumulated depreciation, Equipment, Cr 450000 Deferred Tax assetsDr108000Income tax expenseCr108000 [360000*.30 = 108000] Accumulated DepreciationDr72000Depreciation ExpenseCr72000 [810000/5-450000/5 =162000-90000=72000] Income tax expenseDr21600Deferred Tax assetsCr21600 [72000*.3=21600 OR 108000/5 = 21600]Holmes InstituteApplied Business Statistics for ManagersComprehensive example-continued(v) Consultancy fees revenue dr. $75000Consultancy fees expense cr $75000 Management fee revenue drManagement fee expenses cr$80000$80000 Management fee payable dr $80000Management fee receivable cr $80000Holmes InstituteApplied Business Statistics for ManagersSummary-what we have discussed▪ The lecture considered how to eliminate intragroup transactionsduring the consolidation process▪ The following categories of intra-group transactions wereconsidered:➢ Intra-group dividend payments,➢ Intra-group sales of inventory,➢ Intra-group borrowing➢ Intra-group sales of non-current assets➢ Intra-group service revenue & expenses

QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER

Leave a Reply

Your email address will not be published. Required fields are marked *