HI 5020

Corporate Accounting

Session 8c
Intra-group Transactions
 Session Objectives
•How intra-group sales of non-current assets
inclusive of the related tax expense effects are
accounted for.
 Sales of Non-current Assets
Refer Worked example: 26.5
On 1 July 2018, Eddie Ltd acquired a 100 per cent interest in
Sandy Ltd
On 1 July 2018, Eddie Ltd sells an item of plant to Sandy Ltd for
$780 000
This plant cost Eddie Ltd $1 million, is four years old and has
accumulated 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 cent
 Sales of Non-current Assets
The result of the sale of the item of plant to Sandy Ltd is that the gain of $180
000—the difference between the sales proceeds of $780 000 and the carrying
amount of $600 000—will be shown in Eddie Ltd’s financial statements.
However, from the economic entity’s perspective there has been no ‘sale’ and
therefore no ‘gain on sale’ given that there has been no transaction with a
party external to the group.
The following entry is necessary so that the financial statements will reflect the
balances that would have applied had the intragroup sale not occurred.
Dr Gain on sale of plant 180 000
Dr Plant 220 000
Cr Accumulated depreciation 400 000
The result of this entry is that the intragroup gain is removed and the asset and
accumulated depreciation accounts revert to reflecting the situation had no
sales transaction occurred.
 Sales of Non-current Assets
Impact of tax on gain on sale of item of plant
From Eddie Ltd’s individual perspective it would have made a gain of $180 000 on the sale
of the plant and this gain would have been taxable.
At a tax rate of 30 per cent, $54 000 would be payable in tax by Eddie Ltd and $54 000
would similarly have been included in the income tax expense account.
However, from the economic entity’s perspective, no gain has been made, which means
that the related ‘tax expense’ must be reversed and a related deferred tax benefit
recognised.
Dr Deferred tax asset 54 000
Cr Income tax expense 54 000
Reinstating accumulated depreciation in the statement of financial position
Sandy Ltd would be depreciating the asset on the basis of the cost it incurred to acquire
the asset. Its depreciation charge would be $780 000 ÷ 6 = $130 000
From the economic entity’s perspective, the asset had a carrying value of $600 000, which
was to be allocated over the next six years, giving a depreciation charge of $600 000 ÷ 6 =
$100 000. An adjustment of 30 000 is therefore required.
Dr Accumulated depreciation 30 000
Cr Depreciation expense 30 000
 Sales of Non-current Assets
Consideration of the tax effect of the reduction in depreciation expense
The increase in the tax expense from the perspective of the economic entity is due to the
reduction in the depreciation expense.
The additional tax expense is $9000, which is $30 000 × 30%
This entry represents a partial reversal of the deferred tax asset of $54 000 recognised in
the earlier entry. After six years the balance of the deferred tax asset relating to the sale of
the item of plant will be $nil.
Dr Income tax expense 9 000
Cr Deferred tax asset 9 000
 Putting the Session Together
•The following example brings together some of
the areas covered in these sessions (8a, 8b and
8c).
•We will look at an example where one company
takes over another, transfer of assets and
impairments requiring the following;
1. Create the journals entries, and;
2. Produce consolidated worksheet.
 Sale of Non-current Assets (example)
Bill Ltd acquired 100% interest in Ben Ltd on 1st July 2014 for
$1,275,000
The equity of Ben Ltd was:
Share Capital $750,000
Retained Earnings $450,000
Assets of Ben Ltd (FV) on acquisition.
Day of acquisition, Bill Ltd sells equipment to Ben Ltd for
$1,170,000. Cost was $1.5million, four years old, life of asset
is ten years (date of sale).
On 30th June, 2014, goodwill in Ben Ltd impaired by $10,000.
Financial statements for Bill and Ben are shown on the next
slide:

8
 Sale of Non-current Assets (cont.)
Reconciliation of Opening/closing retained earnings

Bill Ltd (,000) Ben Ltd (,000)

Sales Revenue 3,000 1,350
Less: Cost of Goods Sold 2,100 525
Gross Profit 900 825
Other Income
Gain on sale of Fixed Asset 270
Expenses
Depreciation 195
Other expenses 420 150
Profit before tax 750 480
Tax expense 225 144
Profit after Tax 525 336
Retained earnings – 1/7/13 600 450
Retained earnings – 30/6/14 1,125 786
 Sale of Non-current Assets (cont.)
Statement of Financial Position Bill Ltd (,000) Ben Ltd (,000)
Shareholders Equity
Share capital 1,500 750
Retained earnings 1,125 786
Current Liabilities
Tax payable 225 144
Non-current Liabilities
Loans 600 375
3,450 2,055
Current Assets
Accounts receivable 450 270
Inventory 630 330
Non-current Assets
Land & Buildings 1,095 480
Plant & Equipment 1,170
Less: Accumulated depreciation-P&E 195
Investment in Ben Ltd 1,275
3,450 2,055
 Sale of Non-current Assets (cont.)
a) Share capital 750
Retained earnings 450
Goodwill 75
Investment-Ben Ltd 1,275
To record elimination of investment in controlled entity

b) Gain on Sale-P&E 270

Plant & Equipment 330
Accumulated depreciation 600
To record removal of intra-group gain and re-adjustment
of accumulated depreciation to reflect no transaction
 Sale of Non-current Assets (cont.)
c) Deferred tax asset 81
Income tax expense 81
To record DTA on recorded gain on sale of P&E
($270K x 30%)

d) Accumulated depreciation 45
Depreciation expense 45
To record reinstatement of accumulated depreciation,
being Parent 150K pa – Sub.$195 ($1,170/6yrs).
 Sale of Non-current Assets (cont.)
e) Income tax expense 13.50
Deferred tax asset 13.50
To record consideration of the DTA on
depreciation expense ($45 x 30%)

f) Impairment loss- goodwill 10

Accumulated impairment-Goodwill 10
To record recognition of the impairment of goodwill
This completes the journal entries. The
consolidated Worksheet can now be completed
 Sale of Non-current Assets (cont.)
Reconciliation of opening & Bill Ltd Ben Ltd Adjustments & Eliminations Consolidated
close retained earnings (,000) (,000) Statement
Dr (,000) Cr (,000)
Sales revenue 3,000 1,350 4,350
Less: Cost of goods sold 2,100 525 2,625
Gross Profit 900 825 1,725
Other Income
Gain on Sale of Asset 270 270 (b)
Total income 1,170 825 1,725
Expenses
Depreciation 195 45 (d) 150
Other expenses 420 150 10 (f) 580
Profit before tax 750 480 995
Tax expense 225 144 13.50 (e) 81 (c) 301.50
Profit after Tax 525 336 693.50
Retained earnings 1/7/13 600 450 450 (a) 600
Retained earnings 30/6/14 1,125 786 1,293.50
 Sale of Non-current Assets (cont.)
Statement of Financial position Bill Ltd Ben Ltd Adjustments & Eliminations Consolidated
– Equity & Liabilities (,000) (,000) Statement
Dr. (,000) Cr. (,000)

Shareholders equity
Share capital 1,500 750 750 (a) 1,500
Retained earnings 1,125 786 1,293.50
Current Liabilities
Tax Payable 225 144 369
Non-current Liabilities
Loans 600 375 975
3,450 2,055 4,137.50
 Sale on Non-current Assets (cont.)
Statement of Financial position - Bill Ltd Ben Ltd Adjustments & Eliminations Consolidated
Assets (,000) (,000) Statement
Dr. (,000) Cr. (,000)
Current Assets
Accounts receivable 450 270 720
Inventory 630 330 960
Non-current Assets
Land & Buildings 1,095 480 1,575
Plant & Equipment 1,170 330 (b) 1,500
Accumulated depreciation - P&E 195 45 (d) 600 (b) 750
Investment in Ben Ltd 1,275 1,275 (a)
Deferred tax assets 81 (c) 13.50 (e) 67.50
Goodwill – at cost 75 (a) 75
Accumulated impairment-Goodwill 10 (f) 10
3,450 2,055 4,137.50
2,024.50 2,024.50
 In-Class Worked Example
•You need worksheets to complete the following
example of Gillard and Abbott.

•You will need to do the SIX Journals and then

prepare the consolidations.
 In-class Worked Example (cont.)
Abbott Ltd acquired 100% interest in Gillard Ltd on 1st July
2014 for $2,125,000.
The equity of Gillard Ltd was:
Share Capital $1,250,000
Retained Earnings $ 750,000
Assets of Gillard Ltd (FV) on acquisition.
Day of acquisition, Abbott Ltd sells equipment to Gillard Ltd for
$1,950,000. Cost was $2.5 million, four years old, life of asset
is ten years (date of sale). No residual value
On 30th June, 2015, goodwill in Gillard Ltd impaired by $12,500.
Financial statements for Abbott and Gillard are on the next
slide:
 In-class Worked Example (cont.)
Reconciliation of Opening/closing retained earnings
Abbott Ltd (,000) Gillard Ltd (,000)
Sales revenue 5,000 2,250
Less: Cost of Goods Sold 3,500 875
Gross Profit 1,500 1,375
Other Income
Gain on sale of Fixed Asset 450
Expenses
Depreciation 325
Other expenses 700 250
Profit before tax 1,250 800
Tax expense 375 240
Profit after Tax 875 560
Retained earnings – 1/7/14 1,000 750
Retained earnings – 30/6/15 1,875 1,310
 In-class Worked Example (cont.)
Statement of Financial Position Abbott Ltd (,000) Gillard Ltd (,000)
Shareholders equity
Share capital 2,500 1,250
Retained earnings 1,875 1,310
Current liabilities
Tax payable 375 240
Non-current Liabilities
Loans 1,000 625
5,750 3,425
Current Assets
Accounts receivable 750 450
Inventory 1,050 550
Non-current Assets
Land & Buildings 1,825 800
Plant & Equipment 1,950
Less: Accumulated depreciation-P&E 325
Investment in Gillard Ltd 2,125
5,750 3,425
 Worksheets
Reconciliation of opening & Abbott Ltd Gillard Ltd Eliminations & Adjustments Consolidated
closing retained earnings (,000) (,000) DR (,000) CR (,000) Statement
Sales revenue 5,000 2,250
Less: Cost of Goods Sold 3,500 875
Gross Profit 1,500 1,375
Other Income
Gain on sale of asset 450
Total income 1,950

Expenses
Depreciation 325
Other expenses 700 250
Profit before tax 1,250 800
Tax expense 375 240
Profit after Tax 875 560
Retained earnings 1/7/14 1,000 750
Retained earnings 30/6/15 1,875 1,310
 Worksheets (cont.)
Statement of Financial Abbot Ltd Gillard Ltd Eliminations & Adjustments Consolidated
Position – Equity & Liabilities (,000) (,000) Dr.(,000) Cr.(,000) Statement
Shareholders Equity

Share capital 2,500 1,250

Retained earnings 1,875 1,310

Current Liabilities

Tax payable 375 240

Non-current Liabilities

Loans 1,000 625

5,750 3,425
 Worksheets (cont.)
Statement of Financial position - Abbot Ltd Gillard Ltd Eliminations & Adjustments Consolidated
Assets (,000) (,000) Statement
DR (,000) CR (,000)

Current Assets
Accounts receivable 750 450
Inventory 1,050 550
Non-current Assets
Land & Buildings 1,825 800
Plant & Equipment 1,950
Accumulated depreciation- P&E 325
Investment in Gillard Ltd 2,125
Deferred tax assets
Goodwill – at cost
Accumulated impairment-Goodwill

5,750 3,425
THE END