Tutorial 10

Consolidation: intragroup transactions

(Chapter 28)
Comprehension questions

1. What is meant by ‘realisation of intragroup profits or losses’?

2. With regards to intragroup transfers of inventories, are adjustments for current

period transfers different from adjustments for such transfers happening in a
previous period? Explain.

Application and analysis exercises

1. Current and prior periods intragroup transfers of inventories

Monica Ltd owns all the share capital of Phoebe Ltd. The income tax rate is 30%. The
following transactions took place during the periods ended 30 June 2022 or 30 June 2023.
(a) On 1 May 2022, Monica Ltd sold inventories to Phoebe Ltd for $5 000 on credit,
recording a profit of $1000. Half of the inventories were unsold by Phoebe Ltd at 30
June 2022 and none at 30 June 2023. Phoebe Ltd paid half the amount owed on 15
June 2022 and the rest on 1 July 2022.
(b) On 10 June 2022, Phoebe Ltd sold inventories to Monica Ltd for $18 000 in cash. The
inventories had previously cost Phoebe Ltd $14 000. Half of these inventories were
unsold by Monica Ltd at 30 June 2022 and 30% at 30 June 2023.
(c) On 1 January 2023, Phoebe Ltd sold inventories costing $5000 to Monica Ltd at a
transfer price of $8000, paid in cash. The entire inventories were sold by Monica Ltd
to external entities by 30 June 2023.

Required
In relation to the above intragroup transactions:
i) Prepare adjusting journal entries for the consolidation worksheet at 30 June 2022 and
30 June 2023.
ii) Explain in detail why you made each adjusting journal entry.
(LO2 and LO3)

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 2. Intragroup transfers of inventories, non-current assets, services and dividends

Karen Ltd owns all the share capital of Anne Ltd. The income tax rate is 30%. The
following transactions took place during the periods ended 30 June 2021 to 30 June 2023.
(a) In February 2021, Karen Ltd sold inventories to Anne Ltd for $6000, at a mark-up
of 20% on cost. One-quarter of this inventories were unsold by Anne Ltd at 30 June
2021 to external parties and none at 30 June 2022.
(b) On 1 January 2021, Anne Ltd sold a new tractor to Karen Ltd for $20 000. This had
cost Anne Ltd $16 000 on that day. Both entities charged depreciation at the rate of
10% p.a. on the diminishing balance. The tractor was still on hand with Karen Ltd
at 30 June 2023.
(c) A non-current asset with a carrying amount of $1000 was sold by Karen Ltd to Anne
Ltd for $800 on 1 January 2023. Anne Ltd intended to use this item as inventories,
being a seller of second-hand goods. The item was still on hand at 30 June 2023.
(d) Anne Ltd rented a spare warehouse to Karen Ltd starting from 1 July 2022 for 1
year. The total charge for the rental was $300, and Karen Ltd paid half of this amount
to Anne Ltd on 1 January 2023 and the rest is to be paid on 1 July 2023.
(e) In December 2022, Anne Ltd paid a $1500 interim dividend.
(f) During March 2023, Anne Ltd declared a $3000 dividend. The dividend was paid in
August 2023.

Required
In relation to the above intragroup transactions:
i) Prepare adjusting journal entries for the consolidation worksheet at 30 June 2022 and
30 June 2023.
ii) Explain in detail why you made each adjusting journal entry.
(LO2, LO3, LO4, LO5 and LO6)

3. Consolidation with differences between carrying amount and fair value at acquisition
date and intragroup transactions

Waltzing Ltd purchased 100% of the shares of Matilda Ltd on 1 July 2021 for $50 000.
At that date the equity of the two entities was as follows.

Waltzing Ltd Matilda Ltd

Asset revaluation surplus $25 000 $4 000
Retained earnings 14 500 2 800
Share capital 50 000 40 000

At 1 July 2021, all the identifiable assets and liabilities of Matilda Ltd were recorded at
fair value except for the following.
Carrying Fair value
amount
Inventories $3 000 $3 500
Plant and equipment (cost $80 000) 60 000 61 000

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All of the inventories were sold by December 2021. The plant and equipment had a
further 5-year life. Any valuation adjustments are made on consolidation.

Financial information for Waltzing Ltd and Matilda Ltd for the period ended 30 June
2023 is shown below:
Waltzing Ltd Matilda Ltd
Sales revenue $78 000 $40 000
Dividend revenue 4 400 1 600
Total income 82 400 41 600
Cost of sales 60 000 30 000
Other expenses 10 800 5 000
Total expenses 70 800 35 000
Gross profit 11 600 6 600
Gain on sale of furniture 0 500
Profit before income tax 11 600 7 100
Income tax expense 3 000 2 200
Profit for the period 8 600 4 900
Retained earnings (1/7/22) 14 500 2 800
23 100 7 700
Interim dividend paid 4 000 2 000
Final dividend declared 8 000 2 400
12 000 4 400
Retained earnings (30/6/23) 11 100 3 300

Additional information
(a) Waltzing Ltd records dividend receivable as revenue when dividends are declared.
(b) The beginning inventories of Matilda Ltd at 1 July 2022 included goods which cost
Matilda Ltd $2000. Matilda Ltd purchased these inventories from Waltzing Ltd at
cost plus 33% mark-up in previous year. The inventory was sold on 1 May 2023.
(c) Intragroup sales totalled $10 000 for the period ended 30 June 2023. Sales from
Waltzing Ltd to Matilda Ltd, at cost plus 10% mark-up, amounted to $5600, and
Matilda sold it out to an external party. The ending inventories of Waltzing Ltd
included goods which cost Waltzing Ltd $4400. Waltzing Ltd purchased these
inventories from Matilda Ltd at cost plus 10% mark-up.
(d) On 31 December 2022, Matilda Ltd sold Waltzing Ltd office furniture for $3000. This
furniture originally cost Matilda Ltd $3000 and was written down to $2500 just
before the intragroup sale. Waltzing Ltd depreciates furniture at the rate of 10% p.a.
on cost.
(e) The asset revaluation surplus relates to land. The following movements occurred in
this account:
Waltzing Ltd Matilda
Ltd
1 July 2021 to 30 June 2022 $3 000 $(500)
1 July 2022 to 30 June 2023 2000 500
(f) The tax rate is 30%.

Required
i) Prepare the acquisition analysis at 1 July 2021.
ii) Prepare the business combination valuation entries and pre-acquisition entries at 1
July 2021.

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iii) Prepare the business combination valuation entries and pre-acquisition entries at 30
June 2023.
iv) Prepare the consolidation worksheet journal entries to eliminate the effects of
intragroup transactions at 30 June 2022.
v) Prepare the consolidation worksheet journal entries to eliminate the effects of
intragroup transactions at 30 June 2023.