Chap 28 Consolidation Intragroup Transactions

CHAPTER 28
Consolidation: intragroup
transactions
CHAPTER AIM
This chapter discusses the application of AASB 10/IFRS 10 Consolidated Financial Statements with regards
to transactions between the entities within a group that has wholly owned subsidiaries. The chapter builds on
chapter 27, which discussed the preparation of the consolidated financial statements of a parent and its wholly
owned subsidiary. Specifically, chapter 27 addressed business combination valuation entries and pre-acquisition
entries. The main topic of this chapter is how to prepare further adjustments in the consolidation worksheet to
adjust for transactions occurring between a parent and its subsidiary, such as the sale of inventories from the
parent to its subsidiary at a profit.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

28.1 explain the need for making adjustments for intragroup transactions
28.2 outline the adjustment process and the key questions to consider
28.3 prepare worksheet entries for intragroup transactions involving profits or losses in beginning and
ending inventories
28.4 prepare worksheet entries for intragroup transactions involving profits or losses on the transfer of property,
plant and equipment in both the current and previous periods
28.5 prepare worksheet entries for intragroup services
28.6 prepare worksheet entries for intragroup dividends
28.7 prepare worksheet entries for intragroup borrowings.
CONCEPTS FOR REVIEW
Before studying this chapter, you should understand and, if necessary, revise:
• the nature of the consolidated group and the purpose of preparing consolidated financial statements
• the preparation of business combination valuation entries and pre-acquisition entries
• the use and format of the consolidation worksheet.
Copyright © 2019. Wiley. All rights reserved.
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Created from adelaide on 2021-04-26 08:10:15.
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28.1 The need for intragroup adjustments
LEARNING OBJECTIVE 28.1 Explain the need for making adjustments for intragroup transactions.
The consolidation process involves adding together the financial statements of the parent and its sub-
sidiaries, subject to some adjustments. A consolidation worksheet is used for this process. In chapter 27,
two sets of adjustments were made in the adjustment columns of the worksheet, namely the business
combination valuation entries and the pre-acquisition entries.
In this chapter, further adjustments are made in the worksheet adjustment columns. These adjustments
are to eliminate the effects of intragroup transactions, whether or not profits or losses are made by members
of the group through trading with each other. These adjustments are made to ensure that the financial
position and financial performance of the group are not understated or overstated.
A key point to remember is that the consolidated financial statements are the statements of a group
and are presented as those of a single economic entity. The consolidated financial statements should then
show only the effects of transactions with entities external to the economic entity. This means that:
• consolidated revenues are earned only from transactions with entities external to the group
• consolidated expenses are incurred only from transactions with entities external to the group
• consolidated profit arises only in relation to transactions with entities external to the group
• consolidated assets are recorded at the cost to the group, not necessarily the cost to the legal entity that
owns them
• consolidated liabilities are obligations to entities external to the group.
This chapter focuses on the adjustments for transactions made within a group, and analyses transactions
involving inventories, non-current assets (property, plant and equipment), services, dividends and borrow-
ings. The accounting standard that is applied is AASB 10/IFRS 10 Consolidated Financial Statements.
LEARNING CHECK
The consolidated financial statements should report only the effects of transactions between the group
and external entities.
Adjustments are necessary to remove the effects of transactions between the entities within the group.
28.2 The adjustment process

LEARNING OBJECTIVE 28.2 Outline the adjustment process and the key questions to consider.
The requirement for the full adjustment for the effects of intragroup transactions is stated in para-
graph B86(c) of AASB 10/IFRS 10:
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to
transactions between entities of the group (profits or losses resulting from intragroup transactions that
are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intragroup losses may
indicate an impairment that requires recognition in the consolidated financial statements.
These adjustments are made in the worksheet adjustment columns and, as such, do not carry over to the
next period. The adjustments posted in one period may need to be repeated (under the same or a slightly
different format) in the next period to the extent that the effects of prior period intragroup transactions are
still present in the individual accounts of the legal entities involved.

Remember that, in general, the effects of transactions are recognised by individual entities in accounts
disclosed in the individual statements of financial position (i.e. assets, liabilities and equity) and/or
accounts disclosed in the individual statements of comprehensive income (i.e. expenses and income). The
accounts from the individual statements of comprehensive income are closed at the end of each period to the
retained earnings account. In the consolidation worksheet, the consolidation adjustments to the accounts
disclosed in the individual statements of financial position will be repeated every period against those
accounts as long as the effects of the intragroup transactions are still present. However, the consolidation
adjustments to the accounts disclosed in the individual statements of comprehensive income will be posted
in the consolidation worksheet against those accounts only in the period of the intragroup transactions; in
the next periods, those adjustments will be posted to the opening balance of the retained earnings account
Pdf_Folio:992
992 Financial reporting

as long as the effects of the intragroup transactions are still present in that account. Therefore, it is critically
important when determining an adjustment entry to firstly classify the underlying economic transaction
as a ‘prior period’ transaction or a ‘current period’ transaction, especially when adjusting income and
expenses accounts.
• The effects of current period transactions on the current period income and expenses are present in
accounts such as sales, cost of sales, depreciation expense and income tax expense.
• The effects of prior period transactions on the prior period income and expenses are present in the
retained earnings account (opening balance), while their effects on the current period income and
expenses are present in the respective accounts.
If a transaction is not correctly classified, an incorrect adjustment entry can result. Hence, when
determining the appropriate adjustment entry, the first question that should be asked is as follows.
1. Is this a prior period or a current period transaction? If it is a current period transaction, its effects
will be eliminated against the respective accounts. If it is a prior period transaction, the effects on prior
period income and expenses accounts will be eliminated against the retained earnings account (opening
balance), while its effects on current period accounts will be eliminated against the respective accounts.
Further, when determining the appropriate adjustment entry for a particular transaction, it is useful
to consider the way in which the consolidation worksheet is used.
• The left-hand side of the worksheet contains the legal entities’ amounts recorded in the individual
accounts, incorporating the effects of all transactions, both intragroup and with entities external to
the group.
• The right-hand side of the worksheet contains the group amounts that should be recorded in
the consolidated accounts, incorporating only the effects of transactions with external entities to
the group.
• The adjustment columns are the adjustments necessary to get from the legal entities’ amounts to the
group amounts.
Therefore, the next questions to be asked when analysing an intragroup transaction are as follows.
2. What has been recorded by the legal entities? That is, what accounts on the left-hand side of the
worksheet contain amounts arising from, or affected by, the intragroup transaction and what are the
amounts recorded in those accounts?
3. What should be reported by the group? That is, what amounts should the group report on the right-hand
side of the worksheet for the individual accounts affected by the intragroup transaction?
4. What adjustments are necessary to get from the legal entities’ amounts to the group amounts? That is,
the adjustments are determined by comparing what has been recorded by the legal entities to what the
group needs to report.
In analysing intragroup transactions involving inventories, non-current assets and other items, it is
these questions that will be asked. Note that the flow of the transaction is unimportant; that is, the
adjustment entry is the same whether the parent sells an asset to a subsidiary, or whether a subsidiary
sells it to the parent. The transaction is within the economic entity in both cases and, therefore, its
effects need to be eliminated in full.
Note further that the adjustment process is not aimed at showing the group position as if the
transaction had not occurred. The transaction has occurred. Potentially, a transfer of an asset within a
group may change the use of the asset; for example, an item of plant in one entity may be transferred to
another entity which sells second-hand plant. The latter entity would classify the item as inventories.
The purpose of the consolidation adjustment entries is to adjust for the effects of the transaction on the
amounts recorded.
The fifth question that should be asked when analysing an intragroup transaction is:
5. What is the tax effect of the adjustments made? Having determined the consolidation adjustment
for the intragroup transaction, the tax-effect consequences need to be considered. Obviously, not all
adjustments have tax consequences. The only adjustment entries that have tax consequences are those
where profits or losses are eliminated (current tax effect) and carrying amounts of assets or liabilities
are adjusted (deferred tax effect).
According to paragraph B86(c) of AASB 10/IFRS 10:
AASB 112 [IAS 12] Income Taxes applies to temporary differences that arise from the elimination of profits
and losses resulting from intragroup transactions.
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CHAPTER 28 Consolidation: intragroup transactions 993

Further, according to paragraph 11 of AASB 112/IAS 12:
In consolidated financial statements, temporary differences are determined by comparing the carrying
amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base.
The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a
return is filed. In other jurisdictions, the tax base is determined by reference to the tax returns of each entity
in the group.
In this text, it is assumed that the group does not prepare a consolidated tax return. Therefore, the tax
base of an asset or a liability is the tax base as recognised by the individual legal entity that holds the asset
or liability and it is not affected by the consolidation adjustment. Any difference between the carrying
amount of an asset or liability and its tax base in a legal entity within the group is accounted for by the
legal entity. However, on consolidation, adjustments may be made to the carrying amounts of assets or
liabilities when eliminating intragroup profit or losses and these will create extra temporary differences. In
such cases, any associated tax effect must be considered. Under AASB 112/IAS 12, deferred tax accounts
must be raised where there are temporary differences between the carrying amount of an asset or a liability
and its tax base.
Therefore, immediately following the adjustment entries that eliminate intragroup profits or losses and
adjust the carrying amount of assets or liabilities, a further tax-effect adjustment would be made. This
adjustment will recognise the deferred tax account affected by the change in the temporary difference.
As mentioned above, in this text it is assumed that the parent and each subsidiary are separate tax-
paying entities. However, in Australia, groups comprising a parent and its wholly owned subsidiaries can
elect to be treated as a single entity for tax purposes under the tax consolidation system. Such entities
prepare a consolidated tax return. Under such a scheme, the tax-effect adjustments demonstrated in this
chapter would not apply.
In summary, the five questions are as follows.
1. Is this a prior period or a current period transaction?
2. What has been recorded by the legal entities?
3. What should be reported by the group?
4. What adjustments are necessary to get from the legal entities’ amounts to the group amounts?
5. What is the tax effect of the adjustments made?
Realisation of intragroup profits or losses

The adjustment for intragroup transactions may involve elimination of profits or losses. According to
paragraph B86(c) of AASB 10/IFRS 10:
profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and
fixed assets, are eliminated in full.
Therefore, intragroup profits or losses that require consolidation adjustments are those ‘recognised in
assets’ (i.e. those that affect the carrying amount of assets recognised by the legal entities). As a result
of these profits or losses, those assets are overstated or understated respectively. These profits or losses
can be described as ‘unrealised profits’ and ‘unrealised losses’. The test for realisation is the involvement
of an external entity in relation to the item affected by the intragroup transaction. If an inventories item
is transferred from a subsidiary to the parent entity (or vice versa), no external entity is involved in that
transaction. The profit or loss made by the subsidiary is unrealised to the group. If the parent then sells
that inventories item to a party external to the group, the intragroup profit or loss becomes realised to the
group. This may result in the group recognising the profit or loss in a different period from that in which
it is recognised by the legal entity and, therefore, adjustments may still need to be made.
Handy hints
It is important to understand the reasons the adjustments are made in the consolidation worksheet and
how they are determined. In this text, each line in the adjustment entries is explained separately to ensure
a proper understanding. No line item in an adjustment entry is made just as a balancing item. However,
in preparing the worksheet entries, it is not necessary to go through some of the detailed calculations
necessary for explanatory purposes. In the sections that follow, handy hints are given to assist in an easier
preparation of an adjustment entry.
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LEARNING CHECK
Adjustments are required for both previous periods and current period intragroup transactions to
the extent that the effects of those transactions are still present in the individual accounts of the
entities involved.
Adjustments are determined by comparing the amounts recognised in the individual accounts affected
with the amounts that the group should recognise.
Where adjustments for intragroup transactions affect the carrying amounts of assets and liabilities,
further adjustments are made for the tax effect of those adjustments.
The profits or losses generated from intragroup transfers of assets are considered unrealised from
the group’s perspective and eliminated on consolidation until such moment when those assets are
transferred to external entities.
28.3 Inventories
LEARNING OBJECTIVE 28.3 Prepare worksheet entries for intragroup transactions involving profits or
losses in beginning and ending inventories.
In the following examples, assume that Laura Ltd owns all the share capital of George Ltd, and that the
consolidation process is being carried out on 30 June 2022, for the period ending on that date. Assume
also a tax rate of 30%. For all entries shown for the individual entities, assume the use of a perpetual
inventories system.
28.3.1 Sales of inventories in the current period

Example
On 1 June 2022, Laura Ltd sold inventories to George Ltd for $10 000 cash. The inventories had previously
cost Laura Ltd $8000. What are the consolidation adjustment entries for the period ending 30 June 2022
to eliminate the effects of this intragroup sale?

The intragroup transaction is a current period transaction; only current period accounts will be affected in
the worksheet adjustment entries.
Case 1. The inventories remain unsold at 30 June 2022
Laura Ltd would have made the following entries on the intragroup sale of the inventories.
LAURA LTD
Cash Dr 10 000
Sales Cr 10 000
Cost of sales Dr 8 000
Inventories Cr 8 000
George Ltd would have made the following entry.

GEORGE LTD
Inventories Dr 10 000
Cash Cr 10 000
The journal entries recognise the effects on cash, sales, cost of sales and inventories. However, as the
value of cash does not change by being transferred intragroup, in the analysis of the intragroup transaction
there is no need to consider the cash account. The amounts recorded by the individual legal entities in the
relevant accounts affected by the intragroup transaction, together with the sum of the amounts in each of
those accounts across both entities are as follows.
Pdf_Folio:995

Laura Ltd George Ltd Sum
Sales $10 000 $ 0 $10 000
Cost of sales 8 000 0 8 000
Inventories 0 10 000 10 000

From the group’s perspective, no sale has been made to an external entity. Hence, there have been no sales
or related cost of sales, and inventories should be valued at the original cost to the group: $8000.
A comparison between the sum of the amounts recorded by the legal entities in the relevant accounts and
the amounts that should be reported by the group shows the following.
Sum Group Difference

Sales $10 000 $ 0 $(10 000)
Cost of sales 8 000 0 (8 000)
Inventories 10 000 8 000 (2 000)
Therefore, the aggregate figures recorded by the legal entities need to be adjusted. Sales revenue, cost
of sales and inventories need to be decreased by $10 000, $8000 and $2000 respectively. The adjustment
entry posted in the consolidation worksheet (and not in the journals of the subsidiary or the parent) at
30 June 2022 is as follows.
Consolidation
Sales Dr 10 000
Cost of sales Cr 8 000

In this example, the adjustment entry above reduces the profit by $2000 (i.e. the intragroup profit), as sales
revenue decreases by a greater amount than cost of sales ($10 000 versus $8000). The decrease in profit
decreases income tax expense by 30% of the decrease in profit. At the same time, the carrying amount
of inventories is reduced by $2000, with no effect on the tax base. The decrease in the carrying amount
of inventories creates an extra deductible temporary difference of $2000, giving rise to a deferred tax
asset of 30% of $2000. The deferred tax asset can also be seen as recognising a tax benefit for the group
generated by the fact that, as Laura Ltd recognises the profit on the intragroup sale, they have to pay tax
on it, but, from the group’s perspective, this represents a prepayment of tax as the profit is not recognised
by the group. Therefore, to recognise the tax effect of the adjustment, the second consolidation worksheet
adjustment entry is as follows.
Consolidation
Deferred tax asset Dr 600
Income tax expense Cr 600
Figure 28.1 shows the consolidation worksheet for this simple case after posting the adjustment entries.
The worksheet displays the individual figures reported by the parent (Laura Ltd) and the subsidiary
(George Ltd) in their individual financial statements in the first two columns. The worksheet also includes
the consolidated figures in the last column where inventories are recorded at the cost to the group of $8000,
while the sales revenue, cost of sales and the profit are reported as $0, as from the point of view of the
group no sale has taken place and no profit should be recognised. However, inventories are still recorded
at $10 000 in the individual accounts of George Ltd, while sales revenue, cost of sales and the profit is
still recorded as $10 000, $8000 and $2000 respectively in the individual accounts of Laura Ltd. Also, a
deferred tax asset is recognised in the consolidated accounts for the income tax expense recognised by
Laura Ltd.
Pdf_Folio:996

FIGURE 28.1 Consolidation worksheet
Adjustments
Laura Ltd George Ltd Dr Cr Group
Statement of financial position (extract)
Cash $10 000 $(10 000) $ 0
Inventories 10 000 $2 000 8 000
Deferred tax asset $ 600 600
Current tax liability 600 600
Statement of comprehensive
income (extract)
Sales $10 000 $10 000 $ 0
Cost of sales 8 000 $8 000 0
Gross profit 2 000 0
Income tax expense 600 600 0
Profit after tax 1 400 0
Case 2. The inventories are all on-sold by 30 June 2022 to external entities
Assume that George Ltd had sold all the inventories for $11 000 to external entities.

The journal entries recorded by the legal entities would have been the same as in case 1, with two
extra entries by George Ltd to recognise the external sale. Given a total cost of the inventories to
George Ltd of $10 000, this gives a cost of inventories sold recognised by George Ltd of $10 000.
GEORGE LTD
Cash Dr 11 000
Sales Cr 11 000
The amounts recorded by the individual legal entities in the relevant accounts affected by the intragroup
transaction, together with the sum of the amounts in each of those accounts across both entities are
as follows.
Sales $10 000 $11 000 $21 000
Cost of sales 8 000 10 000 18 000
Inventories 0 0 0

The sale by George Ltd to external entities is recognised by the group, as it involves external entities. The
cost of sales from the group perspective is the original cost to Laura Ltd, not the price paid intragroup by
George Ltd. Therefore, the amounts for the group should be as follows.
Group
Sales $11 000
Cost of sales 8 000

Inventories 0

Sales $21 000 $11 000 $(10 000)
Cost of sales 18 000 8 000 (10 000)
Inventories 0 0 0
Pdf_Folio:997

The consolidation worksheet adjustment entry at 30 June 2022 is then as follows.
Consolidation
Sales Dr 10 000

No tax-effect entry is necessary, as the first adjustment entry does not increase or decrease the overall profit
(the decrease in sales revenue, an income account, is compensated by the decrease of the same amount in
cost of sales, an expense account), or the carrying amount of any asset or liability.
Case 3. The inventories are partially on-sold by 30 June 2022 to external entities
Assume that George Ltd had sold 80% of the inventories for $8500 to external entities.

The entries recorded by the legal entities would have been the same as in case 1, with two extra entries
recognised by George Ltd when they made the external sale. Given a total cost of the inventories to
George Ltd of $10 000, this gives a cost of inventories sold recorded by George Ltd of $8000 (i.e. 80% ×
$10 000).
GEORGE LTD
Cash Dr 8 500
Sales Cr 8 500
Further, the cost of the inventories still held by George Ltd is $2000 (i.e. 20% × $10 000). Therefore,
the amounts recorded by the individual legal entities in the relevant accounts affected by the intragroup
transaction, together with the sum of the amounts in each of those accounts across both entities are
as follows.
Sales $10 000 $8 500 $18 500
Cost of sales 8 000 8 000 16 000
Inventories 0 2 000 2 000

cost of sales from the group perspective is $6400, being 80% of the original cost to Laura Ltd. The cost to
the group of inventories remaining in George Ltd is $1600 (i.e. 20% × $8000). The amounts for the group
are as follows.
Group
Sales $8 500
Cost of sales 6 400
Inventories 1 600
Sales $18 500 $8 500 $(10 000)
Cost of sales 16 000 6 400 (9 600)
Inventories 2 000 1 600 (400)
Pdf_Folio:998

The consolidation worksheet adjustment entry at 30 June 2022 is as follows.
Consolidation
Sales Dr 10 000
Inventories Cr 400

In this example, the adjustment entry above reduces the profit by $400, as sales revenue decreases by
a greater amount than cost of sales ($10 000 versus $9600). The decrease in profit decreases income
tax expense by 30% of $400. At the same time, the adjustment entry decreases the carrying amount of
inventories by $400, while the tax base is not affected. The decrease in the carrying amount of inventories
creates an extra deductible temporary difference between the carrying amount and the tax base, giving rise
to a deferred tax asset of 30% of $400. Therefore, to recognise the tax effect of the adjustment, the second
consolidation worksheet adjustment entry is as follows.
Consolidation

In the case 1 example, the before-tax profit of the group is lower than that recognised by the legal entities
by $2000 (being $0 versus sales $10 000 – cost of sales $8000). This difference is unrealised profit as it
has not yet been recognised by the group. It relates to inventories that are still on hand and not yet on-sold
to external entities. As all inventories transferred intragroup are still on hand with the group, the entire
profit on the intragroup sale is unrealised. The profit will be recognised by the group when the inventories
are sold to external entities.
In the case 2 example, the before-tax profit of the group is equal to that recognised by the legal entities
(being sales $11 000 − cost of sales $8000 versus sales $21 000 − cost of sales $18 000). The profit on the
intragroup sale (being sales $10 000 − cost of sales $8000) is realised profit as it has been included in the
profit recognised by the group. It relates to inventories that have been on-sold to external entities. As all
inventories transferred intragroup are on-sold, the entire profit on the intragroup sale is realised. In other
words, as none of the inventories transferred intragroup is still on hand, there is no unrealised profit.
In the case 3 example, the before-tax profit of the group is lower than that recognised by the legal
entities by $400 (being sales $8500 − cost of sales $6400 versus sales $18 500 − cost of sales $16 000).
This difference is unrealised profit as it has not yet been recognised by the group. It relates to inventories
still on hand and not yet on-sold to external entities. As 20% of the inventories transferred intragroup are
still on hand with the group, 20% of the profit on the intragroup sale is unrealised. As 80% of the inventories
transferred intragroup are on-sold to external entities, 80% of the profit on the intragroup sale is realised.
Handy hints
In preparing the adjustment entries for inventories sold intragroup for a profit within the current period,
note the following.
• In all cases, regardless of the amount of inventories on-sold, the adjustment to sales is always the amount
of the sales within the group (i.e. $10 000).
• The adjustment to inventories is always equal to the percentage (%) of inventories still on hand within the
group multiplied by the profit on the sale within the group (i.e. the unrealised profit = % of inventories
still on hand × (transfer price − original cost)).
Case 1: none sold 100% × $2000 = $2 000

Case 2: all sold 0% × $2000 = $ 0
Case 3: 80% sold 20% × $2000 = $ 400
• The adjustment to cost of sales can be determined as a balancing item once the adjustments to sales and
inventories have been determined (as the difference between the adjustment to sales and the adjustment
to inventories).
Pdf_Folio:999

Case 1: none sold $10 000 − $2 000 = $ 8 000
Case 2: all sold $10 000 − $ 0 = $10 000
Case 3: 80% sold $10 000 − $ 400 = $ 9 600
• The tax effect adjustment is always equal to the tax rate multiplied by the unrealised profit and is posted
as a debit to deferred tax asset and a credit to income tax expense.
Case 1: none sold 30% × $2 000 = $600

Case 2: all sold 30% × $ 0=$ 0
Case 3: 80% sold 30% × $ 400 = $120
• Note that the amount for which the inventories are on-sold to external entities after the intragroup transfer
does not matter in the adjustments. As such, it does not make a difference whether the external sales are
made at a profit or loss.
28.3.2 Sales of inventories in the prior period

Any inventories sold within the group in a prior period and remaining on hand at the end of that period
are still on hand at the beginning of the next period. As such, the unrealised profit related to inventories
still on hand at the end of the prior period is still unrealised at the beginning of the next period. In all the
examples in this section where inventories are still on hand at the beginning of a period, the assumption
used is that inventories will be on-sold to external entities before the end of that period. This assumption
ensures that unrealised profits in beginning inventories become realised by the end of the period.
Example
On 1 June 2021, Laura Ltd sold $10 000 worth of inventories to George Ltd for cash. The inventories
had previously cost Laura Ltd $8000. Of these inventories, 20% were not sold outside the group before
30 June 2021. These remaining inventories were all sold by George Ltd to external entities before 30 June
2022 for $2200. What are the adjustment entries in the consolidation worksheet prepared at 30 June 2022
to eliminate the effects of the intragroup sale?
The intragroup transaction is a prior period transaction. The legal entities recorded a profit on sale of
inventories in the period ended 30 June 2021. Being a prior period event, we should expect to adjust prior
period accounts such as retained earnings (opening balance), together with current period accounts.
Because the inventories were transferred within the group in the prior period, the retained earnings (opening
balance) contains profit in relation to the inventories still on hand at the beginning of the period that is
unrealised from the group perspective. This equals $400 (i.e. 20% × ($10 000 − $8000)). Note that the tax
effects are ignored at this stage. They will be considered when addressing question 5.
To recognise the effect of the external sale, two journal entries are posted by George Ltd. Given a total
cost of the inventories to George Ltd of $10 000, this gives a cost of inventories sold during the current
period of $2000 (i.e. 20% × $10 000).
GEORGE LTD
Cash Dr 2 200
Sales Cr 2 200

The entities would have recorded the following amounts in relation to the inventories on hand at the
beginning of the current period (on-sold by the end of the period to external entities).

Retained earnings (1/7/21) $400 $ 0 $ 400
Sales 0 2 200 2 200
Cost of sales 0 2 000 2 000
Inventories 0 0 0
Pdf_Folio:1000

cost of sales is $1600, being 20% of the original cost to Laura Ltd. No inventories are on hand at the end
of the reporting period. The amounts for the group are as follows.
Group
Retained earnings (1/7/21) $ 0
Sales 2 200
Cost of sales 1 600
Inventories 0
A comparison shows the following.

Retained earnings (1/7/21) $ 400 $ 0 $(400)
Sales 2 200 2 200 0
Cost of sales 2 000 1 600 (400)
Inventories 0 0 0
The first consolidation worksheet adjustment entry at 30 June 2022 is as follows.
Consolidation
Retained earnings (1/7/21) Dr 400
Cost of sales Cr 400

The adjustment entry has no effect on the carrying amount of any asset or liability; hence, there is no
deferred tax-effect entry required. However, it does have an effect on the prior period and current period
profits, decreasing the former and increasing the latter. As a result, the income tax expense for the prior
period has to decrease, leading to an increase in the opening balance of the retained earnings account,
while the income tax expense for the current period has to increase.
The second consolidation worksheet adjustment entry at 30 June 2022 is as follows.
Consolidation
Income tax expense Dr 120
Retained earnings (1/7/21) Cr 120
The two consolidation adjustment entries can be combined into one as follows.
Consolidation
Cost of sales Cr 400
Realisation of intragroup profits

Note that the consolidation adjustment entries in this example ensure that:
• the group’s retained earnings (opening balance) is $280 less than the retained earnings (opening balance)
recognised by the legal entities (as the unrealised profit in beginning inventories should be eliminated
from the prior period profits)
• the group’s current period after-tax profit is $280 greater than the current period after-tax profit recorded
by the legal entities (as the unrealised profit in beginning inventories is realised in the current period).
While the legal entities recognised the after-tax profit of $280 in the period ended 30 June 2021, the group
recognised it in the period ended 30 June 2022, as it was then that the external entities were involved in the
sale. The adjustment entry transfers the unrealised profit from the prior period to the current period when
it was realised. As there is no unrealised profit anymore, there is no need for any worksheet adjustments
in future periods.
Pdf_Folio:1001

Handy hints
In preparing the consolidation adjustment entry for profit remaining in inventories on hand at the beginning
of the current period, to the extent that the inventories are on-sold to external entities by the end of the
current period, note the following.
• The adjustment to retained earnings (opening balance) is the after-tax profit on transferred inventories
remaining on hand at the beginning of the period (also known as after-tax unrealised profit in
beginning inventories).
• The adjustment to cost of sales is the before-tax profit on inventories on hand at the beginning of the
period (also known as before-tax unrealised profit in beginning inventories).
• The adjustment to income tax expense is the tax rate times the adjustment to cost of sales.
• Note that the amount for which the inventories are on-sold to external entities after the intragroup transfer
does not matter in the adjustments. As such, it does not make a difference whether the external sales are
made at a profit or loss.
• Note that only the amount of unrealised profit in beginning inventories is needed in the adjustments; the
amount for which the inventories are transferred intragroup in the prior period does not matter per se.
ILLUSTRATIVE EXAMPLE 28.1
Intragroup transactions involving

transfers of inventories
Sandy Ltd acquired all the issued shares of
Beach Ltd on 1 January 2024. The following
transactions occurred between the two entities
since then.
(a) On 1 June 2024, Sandy Ltd sold inventories
to Beach Ltd for $12 000, these inventories
previously costing Sandy Ltd $10 000. By
30 June 2024, Beach Ltd had on-sold 20%
of these inventories to external entities for
$3000. The other 80% was all sold to external
entities by 30 June 2025 for $13 000.
(b) During the period ended 30 June 2025,
Beach Ltd sold inventories to Sandy Ltd for $6000, this being at cost plus 20% mark-up. Of these
inventories, $1200 remained on hand in Sandy Ltd at 30 June 2025.
The tax rate is 30%.
Required
Prepare the consolidation worksheet entries for Sandy Ltd at 30 June 2025 in relation to the intragroup
transfers of inventories.
Solution
The required consolidation worksheet entries are as follows.
(a) Sale of inventories in previous period
Retained earnings (1/7/24) Dr 1 120

Workings
• The intragroup transaction is a prior period transaction involving inventories still on hand with the group
at the beginning of the current period.
• Profit after tax on the inventories still on hand at 1 July 2024 is $1120 (i.e. 80% × ($12 000 –
$10 000) × (1 – 30%)). Retained earnings (opening balance) should be adjusted for this after-tax
unrealised profit.
• The adjustment to cost of sales is $1600 (i.e. 80% × ($12 000 – $10 000)), equal to the before-tax
unrealised profit.
• The adjustment to income tax expense is the tax rate times the adjustment to cost of sales
(i.e. 30% × $1600 = $480).
Pdf_Folio:1002

(b) Sale of inventories in current period
Sales Dr 6 000
Inventories Cr 200
Workings
• This is a current period transaction involving inventories still on hand at the end of the current period.
• Sales within the group are $6000 and they need to be eliminated in full.
• The inventories remaining on hand at 30 June 2025 are recorded by Sandy Ltd at $1200. As this
represents 20% of the total inventories transferred intragroup of $6000, the cost to the group of these
inventories is $1000 (i.e. 20% × $6000/(1 + 20% mark-up)). The adjustment to inventories is then $200
(i.e. the unrealised profit of $1200 – $1000).
• Cost of sales recorded by the members of the group is $5000 (i.e. $6000/(1 + 20% mark-up)) for
Beach Ltd and $4800 (i.e. $6000 – $1200 or essentially 80% × $6000) for Sandy Ltd; a total of
$9800. Cost of sales for the group is $4000 (i.e. 80% × $6000/(1 + 20% mark-up)). The adjustment
to cost of sales is then $5800. This could also be calculated as a balancing item having determined the
adjustments for sales and inventories (i.e. the difference between the adjustment to sales of $6000 and
the adjustment to inventories of $200).
• As the carrying amount of inventories is reduced by $200, a deferred tax asset of $60 (i.e. 30% × $200)
is raised. This deferred tax asset recognises that the tax paid on the unrealised profit is a prepayment
of tax from the group’s perspective; that is, a tax benefit.
LEARNING CHECK
Adjustments for current period inventories transfers affect current period profit accounts such as sales
and cost of sales.
Adjustments for prior period inventories transfers are only made for prior period unrealised profits or
losses remaining in beginning inventories and affect the retained earnings account.
To the extent that the inventories transferred intragroup are still with the group at the end of the current
period, adjustments are also made to the inventories account.
Where unrealised profit remains in ending inventories, the carrying amount of inventories is affected and
a deferred tax-effect adjustment is required. Where the entire profit in beginning inventories is realised,
only a current tax-effect adjustment is required.
28.4 Property, plant and equipment

LEARNING OBJECTIVE 28.4 Prepare worksheet entries for intragroup transactions involving profits or
losses on the transfer of property, plant and equipment in both the current and previous periods.
Besides transferring inventories, it is possible for property, plant and equipment to be transferred within
the group. The worksheet adjustment entries are shown in two parts:
1. entries to adjust for any profit or loss on transfer of the assets
2. entries relating to any depreciation of the assets after transfer.
As realisation of the profit or loss on transfer can be obtained through the depreciation of the transferred
asset (and not necessarily through the sale of the asset to an external entity), the depreciation entries are
covered in section 28.4.2 in conjunction with the discussion on profit realisation.
If a non-depreciable asset such as land is transferred, only the first of the above two sets of entries
is required, and realisation of the profit or loss occurs, as with inventories, on sale of the asset to an
external entity.
28.4.1 Sale of property, plant and equipment

Example
On 1 July 2022, George Ltd sold some plant to Laura Ltd for $18 500 cash. It had a carrying amount in
George Ltd at time of sale of $18 000. Depreciation charged on plant by George Ltd is 10% p.a. on cost,
Pdf_Folio:1003

while Laura Ltd applies a rate of 6% p.a. on cost. The income tax rate is 30%. What are the consolidation
adjustment worksheet entries at 30 June 2023 to eliminate the effects of this intragroup sale?
The intragroup transaction is a current period transaction.

The journal entries in the records of George Ltd and Laura Ltd at the date of sale, 1 July 2022, are
as follows.
GEORGE LTD
Cash Dr 18 500
Gain on sale of plant Cr 500
Plant Cr 18 000
LAURA LTD
Plant Dr 18 500
Cash Cr 18 500

From the group’s viewpoint there has been no sale of plant to an external entity. Hence there has been no
sale and no gain on sale, and the cost of the plant to the group is the carrying amount of the asset at the
time of transfer from George Ltd to Laura Ltd, namely $18 000.
Legal entities Group Difference

Gain on sale of plant $ 500 $ 0 $(500)
Plant 18 500 18 000 (500)
Note: The column ‘Legal entities’ reflects the sum of the amounts recorded separately by the legal entities.
The consolidation worksheet adjustment entry is as follows.
Consolidation
Gain on sale of plant Dr 500
Plant Cr 500

In the consolidation worksheet entry above, the carrying amount of the plant is reduced by $500, while
its tax base is not affected. This creates an additional deductible temporary difference between carrying
amount and tax base of $500. Hence, a deferred tax asset is raised. Also, as the elimination of the gain
on sale decreased the profit, the income tax expense should be reduced as well. Therefore, the second
consolidation worksheet adjustment entry that recognises the tax effect is as follows.
Consolidation
Note that the adjustment entries for a current period’s intragroup sale of assets at a loss are very similar
to the adjustment entries discussed above for an intragroup sale of assets at a profit. If on 1 July 2022,
George Ltd sold the plant with the original carrying amount of $18 000 to Laura Ltd for $17 500 cash,
the first consolidation adjustment worksheet entry at 30 June 2023 will need to eliminate the loss of sale
of plant of $500 recognised by George Ltd.
Consolidation
Plant Dr 500
Loss on sale of plant Cr 500
Pdf_Folio:1004

In the consolidation worksheet entry above, the carrying amount of the plant and the profit for the period
are increased by $500, resulting in an additional taxable temporary difference and in an increase in income
tax expense respectively. Therefore, the second consolidation worksheet adjustment entry that recognises
the tax effect would be as follows.
Consolidation
Deferred tax liability Cr 150
Handy hints
In preparing the consolidation adjustment entry for intragroup sale, for a profit, of non-current assets
remaining on hand at the end of the current period, note the following.
• The adjustment to both gain on sale and the non-current asset is the difference between the intragroup
sale price and the carrying amount at the point of sale (i.e. intragroup profit).
• The tax effect adjustment is always equal to the tax rate multiplied by the intragroup profit and is posted
as a debit to deferred tax asset and a credit to income tax expense.
What are the consolidation worksheet entries at 30 June 2024 to eliminate the effects of this
intragroup sale?

The entries at 30 June 2024 will account for the transfer of plant as a prior period transaction as the sale
occurred on 1 July 2022.

The transaction occurred in a prior period, so the retained earnings (opening balance) includes a gain on
sale of $500. The plant is recorded at a cost of $18 500.

From the group’s perspective, no transaction occurred with an external entity so there was no prior period
gain, and the cost of the plant to the group is $18 000.

Retained earnings (1/7/23) $ 500 $ 0 $(500)
Plant 18 500 18 000 (500)
Consolidation
Plant Cr 500

The adjustment entry decreases the carrying amount of the plant, with no effect on the tax base; hence,
a deductible temporary difference arises, which creates a deferred tax asset. Also, the entry has an effect
on the prior period profit, decreasing it. As a result, the income tax expense for the prior period has to
decrease, leading to an increase in the opening balance of the retained earnings account.
The second consolidation worksheet adjustment entry at 30 June 2024 is as follows.
Consolidation
Pdf_Folio:1005

These two entries can be combined into the following.
Consolidation
Plant Cr 500
Handy hints
In preparing the consolidation adjustment entry for prior period intragroup sale of non-current assets
remaining on hand at the end of the current period, note the following.
• The adjustment to the non-current asset is the difference between the intragroup sale price of the asset
and its carrying amount at the point of sale (i.e. intragroup profit).
• The adjustment to the retained earnings (opening balance) is the after-tax intragroup profit.
• The tax effect adjustment is always equal to the tax rate multiplied by the intragroup profit and is posted
as a debit to deferred tax asset.
Note also that the above entry would be used in each period that the plant stays on hand, until it gets
sold or reaches the end of the useful life.
28.4.2 Depreciation and realisation of profits

Depreciation is generally measured as a function of the cost of the asset. As the cost of the asset to the group
is different from that recorded by the legal entity holding the asset, it is necessary to make adjustments in
relation to depreciation.
In the example in section 28.4.1 it was noted that the depreciation rate used by George Ltd was 10% p.a.,
different from that used by Laura Ltd of 6% p.a. This would occur if the asset changed its pattern of use on
transfer from one entity to another. The depreciation charged must reflect the pattern of use in the entity
holding the asset. Hence, the appropriate depreciation rate for the group is that used by the entity holding
the asset; in the example, that entity is Laura Ltd as George Ltd sold the asset to Laura Ltd. The rate to be
applied by the group is then 6% p.a.
What are the consolidation adjustment entries for depreciation that need to be posted in the consolida-
tion worksheet at 30 June 2023?

The transaction is a current period transaction.

The journal entry in the records of Laura Ltd to record the depreciation in the first year of holding the asset
is as follows.
LAURA LTD
Depreciation expense Dr 1 110
Accumulated depreciation Cr 1 110
(6% × $18 500)

If the cost of the plant to the group is $18 000, while the depreciation rate is 6%, the annual depreciation
is $1080 (i.e. 6% × $18 000).

Depreciation expense $1 110 $1 080 $(30)
Accumulated depreciation 1 100 1 080 (30)
Pdf_Folio:1006

Consolidation
Accumulated depreciation Dr 30
Depreciation expense Cr 30

The previous entry reduced accumulated depreciation and an expense and hence increased the carrying
amount of the asset and the profit, respectively. The increase in the carrying amount with no effect on
the tax base gives rise to a difference between carrying amount and tax base. This difference is a reversal
of the initial deductible temporary difference recognised when the gain on sale was eliminated and the
carrying amount of the plant was decreased. For the initial temporary difference, a deferred tax asset was
recognised; now, that deferred tax asset needs to be reduced by an amount equal to the tax rate times the
adjustment to accumulated depreciation (i.e. 30% × $30). Note that the reversal to the deferred tax asset
could also be calculated as the depreciation rate times the deferred tax asset balance initially raised on
adjusting for the gain on sale of the plant (i.e. 6% × $150).
The second consolidation worksheet adjustment entry recognising the tax effect is as follows.
Consolidation
Deferred tax asset Cr 9
Handy hints
In preparing the consolidation adjustment entry for depreciation affected by current period intragroup sale
of non-current assets remaining on hand at the end of the current period, note the following.
• The adjustment per annum to the accumulated depreciation and depreciation expense is the difference
between the intragroup selling price of the asset and its carrying amount at the time of the intragroup sale
(i.e. intragroup profit) times the depreciation rate. If the asset was within the group only for a proportion
of the full year during the current period after the intragroup sale, the adjustment per annum needs to
be multiplied by that proportion before it is included in the consolidation adjustment entry.
• The tax effect adjustment is equal to the tax rate multiplied by the adjustment to accumulated
depreciation or depreciation expense and is posted as a debit to income tax expense and a credit to
deferred tax asset.
What are the consolidation adjustment entries for depreciation that need to be posted in the consolida-
tion worksheet at 30 June 2024?
As the intragroup sale occurred in the prior period, this intragroup transaction is a prior period transaction.
Laura Ltd has recorded prior period depreciation expense of $1110 (which has decreased the opening
balance of retained earnings) and current period expense of $1110.
The group recognises depreciation expense of $1080 p.a. in both the current and prior periods.

Retained earnings (1/7/23) $(1 110) $(1 080) $ 30
Depreciation expense 1 110 1 080 (30)
Accumulated depreciation 2 220 2 160 (60)
The consolidation worksheet adjustment entry at 30 June 2024 in relation to depreciation is as follows.
Consolidation
Pdf_Folio:1007

It should be understood that the worksheet entries in subsequent periods will adjust the same accounts
as in the period ended 30 June 2024 to the extent that the asset is still within the group at the beginning of
the period. There will be a current period depreciation expense adjustment, the retained earnings (opening
balance) will be adjusted for the number of prior periods times the annual depreciation expense adjustment,
and the accumulated depreciation will be adjusted by the sum of the depreciation adjustments for the
current and prior periods.

The previous entry reduced accumulated depreciation and a current expense and increased the opening
balance of retained earnings; hence, it increased the carrying amount of the asset and the current and
prior profits, respectively. The increase in the carrying amount gives rise to a difference between carrying
amount and tax base. This difference is a reversal of the initial deductible temporary difference recognised
when the gain on sale was eliminated and the carrying amount of the plant was decreased. For the initial
temporary difference, a deferred tax asset was recognised; now that deferred tax asset needs to be reduced
by an amount equal to the tax rate times the adjustment to accumulated depreciation (i.e. 30% × $60). Note
that the reversal to the deferred tax asset could also be calculated as the depreciation rate times the deferred
tax asset balance initially raised on adjusting for the gain on sale of the plant and times the number of years
(or part-years) since the intragroup sale until the end of the current period (i.e. 6% × $150 × 2 years).
The increases in the current and prior profits give rise to increases in income tax expense for the current
and prior periods. These will be recognised by increasing income tax expense and decreasing the opening
balance of retained earnings respectively.
Consolidation
Handy hints
In preparing the consolidation adjustment entry for depreciation affected by prior period intragroup sale
of non-current assets remaining on hand at the end of the current period, note the following.
• The adjustment per annum to the depreciation expense is the difference between the intragroup sale
price of the asset and its carrying amount before the intragroup sale (i.e. intragroup profit) times the
depreciation rate.
• The adjustment to the retained earnings (opening balance) is the adjustment per annum to the
depreciation expense times the period in years from the intragroup sale to the beginning of the
current period.
• The adjustment to the accumulated depreciation is the adjustment to the depreciation expense plus the
adjustment to the retained earnings (opening balance).
• The tax effect adjustment is:
– reversing deferred tax asset by the tax rate multiplied by the adjustment to accumulated depreciation
– increasing income tax expense by the tax rate multiplied by the adjustment to current depreciation
expense
– decreasing retained earnings (opening balance) by the tax rate multiplied by the adjustment to prior
depreciation expenses.

Realisation of profits or losses normally occurs when an external entity is involved in the transaction.
With inventories, the point of realisation is easy to determine as realisation occurs when the transferred
inventories are on-sold to the external entity. With depreciable assets, determining when the gain or loss
on sale becomes realised to the group is not as simple. The depreciable asset normally remains within the
group and is used in production rather than being sold to external entities. No external entity may ever
become directly involved with the depreciable asset. Hence, to determine the realisation of profit or loss,
an assumption must be made about the realisation process, as it may not be observed just by noting an
external transaction.
Pdf_Folio:1008

The realisation of the profit or loss on a depreciable asset transferred within the group is assumed to
occur when the future benefits embodied in the asset are consumed by the group. In other words, the
depreciable asset transferred within the group may not be sold to an external entity, but will be used up
within the group to generate benefits for the group. As the asset is used up within the group, the benefits are
received by the group. A useful measure of the pattern of benefits received by the group can be obtained
by reference to the depreciation charged on the asset, since the depreciation allocation is related to the
pattern of benefits obtained from the use of the assets. Hence, for depreciable assets, the involvement
of external entities in the transaction occurs on an indirect basis with the assumption being made that
realisation of intragroup profits occurs in a pattern consistent with the allocation of the depreciation of the
non-current asset.
Consider the consolidation worksheet entries at 30 June 2024 in the above example. The consolidation
worksheet adjustment for the gain on sale was as follows.

Plant Cr 500
This entry reduces prior period after-tax profit by $350; that is, there is $350 of unrealised profit. The
group has not recognised this profit of $350 which has been recognised by the legal entities.
The consolidation worksheet entries for depreciation are as follows.
A credit to depreciation expense is a reduction in expenses, and hence an increase in profit. In these two
entries, the after-tax profit is increased by $21 (i.e. $30 increase in profit through depreciation adjustment –
$9 increase in tax expense), both for the current period and for the prior period. That is, as the asset is
depreciated, in each period the profit for the group is $21 greater than that recorded by the legal entities.
That amount is equivalent to the profit on the intragroup sale (i.e. $350) times the depreciation rate
(i.e. 6%). As such, it can be said that the $350 intragroup profit is being realised by the group at
6% p.a. Over the life of the asset, the whole $350 will become realised to the group.
Hence, while normally intragroup profit or loss is realised with the on-sale of the transferred asset to
external entities, with depreciable assets, realisation occurs also as the asset is depreciated. Nevertheless,
the depreciable assets can also be on-sold to external entities and that will also realise the remaining
unrealised profits or losses on the initial intragroup transfer.
28.4.3 Change in classification of transferred assets

It is possible for an item that is transferred within the group to be regarded by the seller as a non-current
asset and by the buyer as inventories or vice versa. Consider the following examples.
Example 1
On 1 June 2023, Laura Ltd sells a machine to George Ltd for $20 000 cash, with Laura Ltd classifying the
machine as a depreciable asset and George Ltd classifying it as inventories (i.e. George Ltd is a seller of
second-hand machinery). The carrying amount of the asset in the books of Laura Ltd was $16 000 on that
date. The asset is still on hand with the group at 30 June 2023. What are the consolidation adjustment
entries that are posted in the consolidation worksheet to eliminate the effects of this transaction at
30 June 2023?
To answer this requirement, the five questions discussed at the beginning of the chapter can be applied.

As the intragroup sale occurs in the current period, this intragroup transaction is a current period
transaction.
Pdf_Folio:1009

Laura Ltd records a gain on sale of $4000, while George Ltd records inventories of $20 000. The
legal entities also record an increase in cash and a decrease in cash respectively for the same amount
(i.e. $20 000). However, as the value of cash does not change by being transferred intragroup (as opposed
to the value of machinery reclassified as inventories), there is no need to take cash into consideration when
preparing consolidation adjustments.

From the group’s perspective, the intragroup gain on sale should not be recognised. The asset should be
recorded as inventories (as from now on, it is going to be used as inventories by the entity that has the asset
in the group, and not as machinery), but with an amount equal to the carrying amount at the date of the
intragroup sale (i.e. $16 000).
Given the differences between the items and the amounts recorded by the legal entities and those that
should be reported by the group, the gain on sale should be eliminated, while inventories should decrease
from $20 000 to $16 000. Therefore, the consolidation worksheet entry should be as follows.
Gain on sale Dr 4 000

Note that, as the asset is now classified as inventories, there is no depreciation recorded by the owner of
the asset. As the group should not recognise any depreciation either, there is no need for any depreciation
adjustments to be posted in the consolidation worksheet.

As the first adjustment entry decreases the profit by $4000 by eliminating the gain on sale, the group
should recognise a decrease in income tax expense of 30% times $4000. Also, the carrying amount of the
inventories is decreased with no impact on the tax base, creating an extra deductible temporary difference
of $4000 that gives rise to a deferred tax asset of 30% times $4000. Therefore, the second consolidation
worksheet entry should be as follows.
Deferred tax asset Dr 1 200

Income tax expense Cr 1 200
Note that if the inventories item was sold by the end of the current period to external entities, the
first consolidation adjustment entry will include a credit to cost of sales, instead of inventories and the
effect on the profit and the carrying amount of inventories will be zero. As such, there will not be any tax
effect entry.
Handy hints
In preparing the consolidation adjustment entry for current period intragroup transfer of non-current assets
to inventories still on hand at the end of the period, note the following.
• The adjustment to both gain on sale and inventories is the difference between the intragroup sale price
and the carrying amount at the point of sale (i.e. intragroup profit).
• The tax effect adjustment is equal to the tax rate multiplied by the intragroup profit and is posted as a
debit to deferred tax asset and a credit to income tax expense.

In preparing the consolidation adjustment entry for current period intragroup transfer of non-current
assets to inventories sold by the end of the period, note the following.
• The adjustment to both gain on sale and cost of sales is the difference between the intragroup sale price
and the carrying amount at the point of intragroup sale (i.e. intragroup profit).
• There is no tax effect adjustment as the intragroup profit is realised and no net adjustment to profit or
carrying amount of assets was necessary.
Example 2
On 1 July 2022, Laura Ltd sells a machine to George Ltd for $20 000 cash, with Laura Ltd classifying
the machine as inventories and George Ltd classifying it as machinery (i.e. Laura Ltd is a manufacturer
of machinery). The cost of the asset in the books of Laura Ltd was $16 000 on that date. The asset is
Pdf_Folio:1010

depreciated by George Ltd at a rate of 10% p.a. on cost and is still on hand with the group at 30 June 2023.
What are the consolidation adjustment entries that are posted in the consolidation worksheet to eliminate
the effects of this transaction at 30 June 2023?

As the sale occurs at the beginning of the current period, this intragroup transaction is a current
period transaction.

Laura Ltd records sales revenue of $20 000 and cost of sales of $16 000 as from its perspective, this is a sale
of inventories. George Ltd records machinery of $20 000. Moreover, as the asset is depreciable, a depre-
ciation expense is recognised by George Ltd in accumulated depreciation (i.e. 10% × $20 000 = $2000).
The legal entities record also an increase in cash and a decrease in cash respectively for the same amount
(i.e. $20 000). However, the value of cash does not change by being transferred intragroup (as opposed to
the value of inventories reclassified as machinery), so there is no need to take cash into consideration when
preparing consolidation adjustments.

From the group’s perspective, the intragroup sale should not be recognised. The asset should be recorded
as machinery (as from now on, it is going to be used as machinery by the entity that has the asset
in the group, and not as inventories), but with an original amount equal to the cost at the date of
the intragroup sale (i.e. $16 000). Moreover, as the asset is depreciable, a depreciation expense needs
to be recognised by the group in accumulated depreciation based on the original cost to the group
(i.e. 10% × $16 000 = $1600).
Given the differences between the items and the amounts recorded by the legal entities and those
that should be reported by the group, the sales and the cost of sales should be eliminated and the machinery
should decrease from $20 000 to $16 000. Also, the depreciation expense and the accumulated depreciation
should be reduced by $400 (i.e. $2000 – $1600). Therefore, the consolidation worksheet entries should be
as follows.
Sales Dr 20 000
Machinery Cr 4 000

As the first adjustment entry decreases the profit by $4000 by eliminating the sales of $20 000 and cost of
sales of $16 000, the group should recognise a decrease in income tax expense of 30% × $4000. Also, the
carrying amount of the machinery is decreased with no impact on the tax base, creating an extra deductible
temporary difference of $4000 that gives rise to a deferred tax asset of 30% × $4000. Therefore, the first
tax consolidation worksheet entry should be as follows.

However, the second consolidation adjustment entry that decreases the depreciation expense increases
the profit by $400 (effectively realising a part of the gain from the intragroup transfer) and increases
the carrying amount of the asset. The former effect increases the income tax expense by 30% × $400. The
latter effect reverses the deductible temporary difference that created a deferred tax asset by 10% of the
original amount recognised (i.e. 10% × 30% × $4000). Therefore, the second tax consolidation worksheet
entry should be as follows.

Pdf_Folio:1011

Handy hints
In preparing the consolidation adjustment entries for current period intragroup transfer of inventories to
non-current assets still on hand at the end of the period, note the following.
• The adjustment to sales revenue is the intragroup sale price.
• The adjustment to cost of sales is the original cost of inventories sold intragroup.
• The adjustment to the non-current asset is the difference between the sale price and the original cost
(i.e. intragroup profit).
• The adjustment to the depreciation expense per annum is the depreciation rate times the intragroup
profit.
• The tax effect adjustment for the elimination of the gain on the intragroup transfer is equal to the tax rate
multiplied by the intragroup profit and is posted as a debit to deferred tax asset and a credit to income
tax expense.
• The tax effect adjustment for depreciation is equal to the tax rate multiplied by the adjustment
to depreciation expense and is posted as a credit to deferred tax asset and a debit to income tax expense.
In preparing the consolidation adjustment entries for prior period intragroup transfer of inventories to
non-current assets still on hand at the end of the current period, note the following.
• The adjustment to the retained earnings (opening balance) and non-current asset is the difference
between the sale price and the original cost (i.e. intragroup profit).
• The adjustment to the depreciation expense per annum is the depreciation rate times the intragroup
profit. The adjustment to current depreciation expense will be posted against the depreciation expense
account, while the adjustment to depreciation expenses of prior periods will be posted against the
retained earnings (opening balance).
• The tax effect adjustment for the elimination of the gain on the intragroup transfer is equal to the tax
rate multiplied by the intragroup profit and is posted as a credit to retained earnings (opening balance)
and a debit to deferred tax asset.
• The tax effect adjustment for depreciation is equal to the tax rate multiplied by the adjustment to
depreciation expense. The tax adjustment for current depreciation expense will be posted against the
income tax expense account, while the tax adjustment for depreciation expenses of prior periods will be
posted against the retained earnings (opening balance). A credit to deferred tax asset will also be posted
equal to the tax rate multiplied by the total adjustment to current and prior depreciation expenses.
Intragroup transactions involving

non-current assets
Toowoomba Ltd owns all the issued shares of
Mandurah Ltd. The following transactions occurred.
(a) On 1 January 2021, Mandurah Ltd sold an item
of plant to Toowoomba Ltd for $120 000. At time
of sale, this asset had a carrying amount in the
records of Mandurah Ltd of $115 000. The asset
is to be depreciated on a straight-line basis at
10% p.a. on cost and it is still on hand with
Toowoomba Ltd at 30 June 2023.
(b) On 16 May 2023, Toowoomba Ltd sold
equipment to Mandurah Ltd for $50 000, this

asset having a carrying amount at time of sale of $40 000. The equipment was regarded by
Toowoomba Ltd as a depreciable non-current asset, being depreciated at 10% p.a. on cost, whereas
Mandurah Ltd records the equipment as inventories. The asset was sold by Mandurah Ltd to an
external entity before 30 June 2023.
Required
Prepare the consolidation worksheet adjustment entries for the preparation of consolidated financial
statements at 30 June 2023. The tax rate is 30%.
Solution
The required entries for the consolidation worksheet at 30 June 2023 are as follows.
Pdf_Folio:1012

(a) Sale of plant in prior period
Plant Cr 5 000
Accumulated depreciation Dr 1 250
Workings
• This intragroup transaction is a prior period transaction involving the sale of a non-current asset.
• Profit after tax on the intragroup sale is $3500 (i.e. ($120 000 − $115 000) × (1 − 30%)); retained earnings
(opening balance) needs to be adjusted for this after-tax intragroup profit.
• The adjustment to the carrying amount of plant is $5000 (i.e. $120 000 − $115 000), equal to the before-
tax profit on the intragroup sale; this adjustment gives rise to a deferred tax asset of $1500 (i.e. 30% ×
$5000).
• The adjustment per annum to the current depreciation expense is the intragroup profit times the
depreciation rate (i.e. 10% × $5000 = $500).
• The adjustment to the retained earnings (opening balance) for prior periods depreciation is the
adjustment per annum to the depreciation expense multiplied by the time period from the intragroup
sale to the beginning of the current period (i.e. $500 × 1.5 years = $750).
• The adjustment to the accumulated depreciation is the adjustment to the current depreciation expense
plus the adjustment to the retained earnings (opening balance).
• The tax effect related to the depreciation adjustment is:
– reversing deferred tax asset by the tax rate multiplied by the adjustment to accumulated depreciation
– increasing income tax expense by the tax rate multiplied by the adjustment to current depreciation
expense
– decreasing retained earnings (opening balance) by the tax rate multiplied by the adjustment to prior
depreciation expenses.
(b) Sale of equipment in current period, and classified as inventories by buyer
Gain on sale of equipment Dr 10 000

Workings
• The intragroup transaction is a current period transaction involving a non-current asset transferred
intragroup as inventories and then sold to external entities by the end of the current period.
• The adjustment to gain on sale and cost of sales is $10 000 (i.e. $50 000 − $40 000), equal to the before-
tax profit on the intragroup transfer.
• No tax effect adjustment is necessary as the inventories were sold to external entities by the end of the
current period.
LEARNING CHECK
Adjustments for the gain/loss on sale of property, plant and equipment are made in all periods in which
the assets are still within the group.

Where the transferred assets are depreciable, adjustments are made to the depreciation expense
account (for the current period depreciation) or to the retained earnings account (for the previ-
ous periods’ depreciation), the adjustments being a proportion of the gain/loss on sale based on
the depreciation rate per year and the time period for which the asset is depreciated after the
intragroup sale.
As depreciation reflects the use of the asset by the group, the depreciation adjustments are considered
to be realising a part of the gain/loss on the intragroup sale of property, plant and equipment.
As the adjustments for intragroup sale of property, plant and equipment that are still on hand with
the group affect the profit and the carrying amount of assets, adjustments for the tax effects are
also required.
Pdf_Folio:1013

28.5 Intragroup services
LEARNING OBJECTIVE 28.5 Prepare worksheet entries for intragroup services.
Many different examples of services between a parent and its subsidiary exist, as follows.
• Laura Ltd may lend some specialist personnel to George Ltd for a limited period of time to perform
a particular task for George Ltd. For this service, Laura Ltd may charge George Ltd a certain fee, or
expect George Ltd to perform other services in return.
• George Ltd may lease or rent an item of plant or a warehouse from Laura Ltd or vice versa.
• George Ltd may exist solely for the purpose of carrying out some specific task, such as research activities
for the parent, and a fee for such activities is charged. In this situation, all service revenue earned by the
subsidiary is paid for by the parent, and must be adjusted in the consolidation process.
Example
During the period ended 30 June 2022, Laura Ltd offered George Ltd the services of an employee who
had specialist marketing skills. The employee served with George Ltd for 2 months, and in return for the
services George Ltd paid $80 000 to Laura Ltd. What are the consolidation worksheet entries at 30 June
2022 to eliminate the effects of this intragroup transaction?

This intragroup transaction is a current period transaction.

The entries recorded by the legal entities are as follows.
LAURA LTD
Cash Dr 80 000
Service revenue Cr 80 000
GEORGE LTD
Service expense Dr 80 000
Cash Cr 80 000

There has been no external entity involved in this transaction. To the group there is no expense or revenue.

Service revenue $80 000 0 $(80 000)
Service expense 80 000 0 (80 000)
Consolidation
Service revenue Dr 80 000

Service expense Cr 80 000

The consolidation worksheet adjustment entry does not affect the carrying amount of any asset or liability
or the overall profit. Therefore, there is no tax-effect adjustment.

With the transfer of services within the group, the consolidation adjustments do not affect the profit of
the group. In a transaction involving a payment by a parent to a subsidiary, or vice versa, for services
rendered, the client shows an expense and the service provider shows a revenue. The net effect on the
Pdf_Folio:1014

group’s profit is zero. Hence, from the group’s perspective, there are no unrealised profits or losses from
intragroup services.
Handy hints
In preparing the consolidation adjustment entries for current period intragroup services, note the following.
• The adjustment to service revenue and service expense is the intragroup fee charged for those services.
• If the intragroup services have not been paid by the end of the current period, an adjustment to fees
receivable and fees payable is also required for the amount unpaid.
• There is no tax adjustment.
• Note that no adjustment needs to be posted in the subsequent periods, unless the fee remains unpaid by
the end of a future period (in those cases, an adjustment to fees receivable and fees payable will still be
required for the amount unpaid).
LEARNING CHECK
Adjustments for previous periods’ intragroup services affect only statement of financial position
accounts, but only if the fees have not been paid.
Adjustments for current period intragroup services affect statement of profit or loss and other
comprehensive income accounts and statement of financial position accounts if the fees have not
been paid and only statement of profit or loss and other comprehensive income accounts if the fees
have been paid.
It is not necessary to have a tax-effect adjustment when adjusting for intragroup services.
Profits/losses on intragroup services are considered immediately realised to the group.
28.6 Dividends
LEARNING OBJECTIVE 28.6 Prepare worksheet entries for intragroup dividends.
Where a parent owns all the shares in a subsidiary, all dividends paid/payable by the subsidiary are
received/receivable by the parent. The subsidiary may pay the dividends from pre-acquisition or post-
acquisition equity. According to paragraph 12 of AASB 127/IAS 27 Separate Financial Statements:
Dividends from a subsidiary, a joint venture or an associate are recognised in the separate financial
statements of an entity when the entity’s right to receive the dividend is established. The dividend is
recognised in profit or loss unless the entity elects to use the equity method, in which case the dividend is
recognised as a reduction from the carrying amount of the investment.
Remember that the assumption used in this text is that the parent recognises its investment in subsidiaries
at cost, subject to impairment, not using the equity method. If dividends from pre-acquisition equity cause
a decrease in the value of the investment, an impairment loss may be recognised by the parent on the
investment in subsidiary account. The impairment loss will have to be eliminated on consolidation, together
with all the other effects of the intragroup dividends.
28.6.1 Dividends declared in the current period but not paid

Example
On 25 June 2022, George Ltd declares a dividend of $10 000. At the end of the period, the dividend
remains unpaid. What are the consolidation worksheet entries at 30 June 2022 to eliminate the effects of
this intragroup transaction?

The entries in the legal entities’ records are as follows.
GEORGE LTD
Dividend declared Dr 10 000
Dividend payable Cr 10 000
Pdf_Folio:1015

LAURA LTD
Dividend receivable Dr 10 000
Dividend revenue Cr 10 000

From the group’s point of view there is no revenue or reduction in retained earnings as no external entity
is involved with the transaction. In relation to the liability dividend payable, the obligation is not to pay
monies to any entity external to the group. In relation to the asset dividend receivable, the group does not
expect to receive monies from entities external to the group.

Dividend declared $10 000 0 $(10 000)
Dividend payable 10 000 0 (10 000)
Dividend receivable 10 000 0 (10 000)
Dividend revenue 10 000 0 (10 000)
The consolidation worksheet adjustment entries are as follows.

Consolidation
Dividend payable Dr 10 000
Dividend declared Cr 10 000
Dividend revenue Dr 10 000
Dividend receivable Cr 10 000

The carrying amount of both an asset and a liability are affected by these adjustment entries. However, no
tax-effect entry is necessary as there is no effect on the net assets.
What are the consolidation worksheet entries at 30 June 2023 to eliminate the effects of this
intragroup transaction?
Assume the dividend declared in June 2022 is paid in August 2022. At 30 June 2023, the declaration of
intragroup dividends on 25 June 2022 would be considered as a prior period transaction. However, there
is no adjustment required in relation to retained earnings (opening balance) as the dividend declared and
dividend revenue recognised in the prior period had a zero net effect on the consolidated retained earnings.
As the dividend was paid in August 2022, in the consolidation worksheet at 30 June 2023 there are no
accounts on the left-hand side of the worksheet relating to the dividend; that is, the dividend receivable
and dividend payable were closed on payment of the dividend. Hence, there are no adjustment entries
required in the 2023 worksheet or in any other future worksheet with regards to the dividends declared in
2022 and paid in 2023.
Handy hints
In preparing the consolidation adjustment entries for current period dividends declared and not yet paid,
note the following.
• The adjustment to dividend revenue, dividend declared, dividend receivable and dividend payable is the
amount of dividend declared intragroup.

• Note that no adjustment needs to be posted in the subsequent periods.
28.6.2 Dividends declared and paid in the current period

Example
In January 2022, George Ltd pays an interim dividend of $6000. What are the consolidation worksheet
entries at 30 June 2022 to eliminate the effects of this intragroup transaction?

Pdf_Folio:1016

The entries passed by Laura Ltd and George Ltd in January 2022 are as follows.
LAURA LTD
Cash Dr 6 000
Dividend revenue Cr 6 000
GEORGE LTD
Interim dividend paid Dr 6 000
Cash Cr 6 000

The group has not entered into any transaction with external entities. The group has earned no revenue nor
incurred any expense.

Dividend revenue $6 000 0 $(6 000)
Interim dividend paid 6 000 0 (6 000)
Consolidation
Interim dividend paid Cr 6 000

As no carrying amount of asset or liability is affected by the entry, there is no tax-effect entry required.
There is no consolidation worksheet adjustment required in periods subsequent to 30 June 2022 as the
individual accounts are closed to the retained earnings and do not have any net impact on the consolidated
figures.
Handy hints
In preparing the consolidation adjustment entries for current period dividends declared and paid, note
the following.
• The adjustment to dividend revenue and dividend declared is the amount of dividend declared intragroup.
• No adjustment needs to be posted in the subsequent periods.
28.6.3 Bonus share dividends

Example
Assume a bonus share dividend of $5000 is paid by George Ltd out of post-acquisition profits on
1 June 2022. What are the consolidation worksheet entries at 30 June 2022 to eliminate the effects of
this intragroup transaction?
The journal entry made by George Ltd is as follows.
GEORGE LTD
Bonus share dividend Dr 5 000
Share capital Cr 5 000
Since the bonus share dividend is paid by George Ltd out of post-acquisition profits, these profits, which
for consolidation purposes are normally available for dividends, have been capitalised as share capital.
In the records of Laura Ltd, no entry is required as the bonus share dividend does not give Laura Ltd an
increased share of George Ltd; that is, Laura Ltd receives nothing that it did not previously own.
Pdf_Folio:1017

For consolidation purposes, two alternative adjustments are possible.
1. Eliminate the bonus dividend paid against the share capital of George Ltd; that is, reverse the entry
made by the subsidiary to record the dividend as follows.
Consolidation
Share capital Dr 5 000
Bonus share dividend Cr 5 000
If this entry is used, the fact that George Ltd has provided for a bonus dividend does not appear
in the consolidated financial statements unless disclosed by way of a note. The consolidated retained
earnings balance will include profits that have been distributed as bonus shares and are not available
for the payment of dividends.
2. Do not eliminate the bonus dividend paid but set up a new capitalised profits reserve in the consolidation
worksheet. The entry is as follows.
Consolidation
Capitalised profits reserve Cr 5 000
The purpose of creating this reserve is to disclose the fact that part of the retained earnings of
the group has been distributed by the subsidiary and is therefore no longer available for payment of
dividends to the parent.
Alternative (2) is recommended as the preferred treatment of bonus share dividends on consolidation
as it raises the capitalised profits reserve in the consolidated financial statements as a non-distributable
reserve.
Intragroup dividends
Grey Ltd owns all the issued shares of Dolphin Ltd, having acquired them for $250 000 on 1 January 2022.
In preparing the consolidated financial statements at 30 June 2024, the accountant documented the
following transactions.
2023
Jan. 15 Dolphin Ltd paid an interim dividend of $10 000.
June 25 Dolphin Ltd declared a dividend of $15 000, this being recognised in the records of
both entities.
Aug. 1 The $15 000 dividend declared on 25 June was paid by Dolphin Ltd.
2024
Jan. 18 Dolphin Ltd paid an interim dividend of $12 000.
June 23 Dolphin Ltd declared a dividend of $18 000, this being recognised in the records of
both entities.
The tax rate is 30%.

Required
Prepare the consolidation worksheet adjustment entries for the preparation of consolidated financial
statements at 30 June 2024.
Solution
The required consolidation worksheet entries are as follows.

1. Interim dividend paid

Dividend paid Cr 12 000
Pdf_Folio:1018

2. Final dividend declared
Dividend payable Dr 18 000

Dividend declared Cr 18 000
Dividend receivable Cr 18 000
LEARNING CHECK
Dividends from subsidiary are recognised as revenue by the parent and do not affect the investment in
the subsidiary.
Consolidation adjustments affect both the dividend accounts raised by the subsidiary and those raised
by the parent.
Consolidated financial statements show only the effects of dividends paid or payable to entities outside
the group.
There are no tax-effect entries relating to adjustments for dividends.
28.7 Intragroup borrowings

LEARNING OBJECTIVE 28.7 Prepare worksheet entries for intragroup borrowings.
Members of a group often borrow and lend money among themselves, and may charge and pay interest
on the money borrowed. In some cases, an entity may be set up within the group solely for the purpose
of handling group finances and for borrowing money on international money markets and then offering
the funds via intragroup borrowings to the other entities within the group. Consolidation adjustments are
necessary in relation to these intragroup borrowings and interest thereon because these transactions create
assets and liabilities, and revenues and expenses, that do not exist in terms of the group’s relationship with
external entities.
Example
On 1 July 2022, Laura Ltd lends $100 000 to George Ltd, charging interest of $9000 p.a. What are the
consolidation worksheet entries at 30 June 2023 to eliminate the effects of this intragroup transaction?


The entries are as follows.
LAURA LTD
Advance to George Ltd Dr 100 000
Cash Cr 100 000
Cash Dr 9 000
Interest revenue Cr 9 000
GEORGE LTD
Cash Dr 100 000
Advance from Laura Ltd Cr 100 000
Interest expense Dr 9 000
Cash Cr 9 000

From the group’s perspective, there is no loan made to an external entity. Hence, no asset or liability exists
in relation to an external entity, and no revenues or expenses have been incurred.
Pdf_Folio:1019


Advance to George Ltd $100 000 0 $(100 000)
Advance from Laura Ltd 100 000 0 (100 000)
Interest revenue 9 000 0 (9 000)
Interest expense 9 000 0 (9 000)
The consolidation worksheet adjustment entries are as follows.
Consolidation
Advance from Laura Ltd Dr 100 000
Advance to George Ltd Cr 100 000
Interest revenue Dr 9 000
Interest expense Cr 9 000
While the loan remains in existence, the same worksheet entries are required in each period’s worksheet.

The effect on net assets is zero. Hence, no tax-effect entry is necessary.
Handy hints
In preparing the consolidation adjustment entries for intragroup borrowings, note the following.
• The adjustment to intragroup liability (e.g. Advance from X Ltd) and intragroup receivable (e.g. Advance
to Y Ltd) is the amount of intragroup borrowings.
• The adjustment to interest revenue and interest expense is the amount of interest incurred on the
intragroup borrowing during the current period. If some interest remains unpaid at the end of the period,
an adjustment to interest receivable and interest payable for the amount unpaid is also required. If
some interest is paid in advance, an adjustment to interest received in advance and prepaid interest is
also required.
• No adjustment needs to be posted in the subsequent periods.
Intragroup debentures
On 1 January 2022, Janelle Ltd issues 1000 $100 debentures with an interest rate of 15% p.a. payable on
1 January of each year. Adam Ltd, a wholly owned subsidiary of Janelle Ltd, acquires half the debentures
issued. The journal entries made by Janelle Ltd and Adam Ltd for the year ended 30 June 2019 are
as follows.
JANELLE LTD
2022
Jan. 1 Cash Dr 100 000
Debentures Cr 100 000
(Issue of debentures)
June 30 Interest expense Dr 7 500

Interest payable Cr 7 500
(Accrued interest payable of 15% for 6 months)
Pdf_Folio:1020

ADAM LTD
2022
Jan. 1 Debentures in Janelle Ltd Dr 50 000
Cash Cr 50 000
(Debentures acquired)
June 30 Interest receivable Dr 3 750
Interest revenue Cr 3 750
(Accrued interest revenue)
The consolidation entries to adjust for the entries recorded in the legal entities are as follows.
Consolidation
Debentures Dr 50 000
Debentures in Janelle Ltd Cr 50 000
Interest payable Dr 3 750
Interest receivable Cr 3 750
Interest revenue Dr 3 750
Interest expense Cr 3 750
LEARNING CHECK
Intragroup borrowings result in assets in one entity of the group and liabilities in another. Interest
payments result in revenues in one entity of the group and expenses in another. Adjustments
are necessary to eliminate those effects recorded by the entities within the group.
There are no tax-effect entries relating to adjustments for intragroup borrowings.
Pdf_Folio:1021

SUMMARY
This chapter has dealt with the accounting for intragroup transactions when preparing the consolidation
worksheet in accordance with AASB 10/IFRS 10 Consolidated Financial Statements. The key points are
as follows.
• The group recognises only profits or losses on transactions between the group and entities external to
the group.
• The adjustment entries do not affect the records or financial statements of the parent and subsidiaries,
even though there may be a record in general journal form of the adjustment entries passed in
a worksheet.
• When determining the relevant adjustment entries, the transactions need to be classified into current and
prior period transactions.
• The key questions to be answered when preparing the consolidation adjustments for the intragroup
transactions are as follows.
KEY TERMS
consolidated financial statements The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those
of a single economic entity.
group A parent and its subsidiaries.
DEMONSTRATION PROBLEM
28.1 Comprehensive problem
On 1 July 2019, Bull Ltd acquired all the share capital of Shark Ltd for $472 000. At that date,
Shark Ltd’s equity consisted of the following.
Share capital $300 000

General reserve 96 000
Retained earnings 56 000
At 1 July 2019, all the identifiable assets and liabilities of Shark Ltd were recorded at fair value.
Financial information for Bull Ltd and Shark Ltd for the period ended 30 June 2023 is presented
in the left-hand columns of the worksheet in figure 28.2.
Additional information
• On 1 January 2023, Shark Ltd sold inventories costing $30 000 to Bull Ltd for $50 000. Half of
the inventories were sold to external entities for $28 000 by 30 June 2023.
• On 1 January 2022, Shark Ltd sold an inventories item costing $2000 to Bull Ltd for $4000.
Bull Ltd treated this item as equipment and depreciated it at 5% p.a. on a straight-line basis.
• In the period ended 30 June 2021, Bull Ltd sold land to Shark Ltd for $40 000, which was $20 000
above cost. The land is still held by Shark Ltd at 30 June 2023.
• At 1 July 2022, there was a $6000 profit in the inventories of Bull Ltd from goods acquired from
Shark Ltd for $30 000 in the previous period.
• The tax rate is 30%.
Required
Prepare the consolidated financial statements for the period ended 30 June 2023.
Pdf_Folio:1022

SOLUTION
The first step is to determine the business combination valuation and pre-acquisition entries at
30 June 2023. These entries are prepared after undertaking an acquisition analysis for Bull Ltd’s
acquisition of all the shares in Shark Ltd.
At 1 July 2019:
Net fair value of the identifiable assets and liabilities of Shark Ltd = $300 000 + $96 000 + $56 000
= $452 000
Consideration transferred = $472 000
Goodwill = $20 000
Consolidation worksheet entries

1. Business combination valuation entry
As all the identifiable assets and liabilities of Shark Ltd are recorded at amounts equal to their
fair values, the only business combination valuation entry required is that for goodwill.
Goodwill Dr 20 000
Business combination valuation reserve Cr 20 000
2. Pre-acquisition entry
The entry at 30 June 2023 is the same as that at acquisition date as there have not been any
events affecting that entry since acquisition date (i.e. no transfers from pre-acquisition equity).

General reserve Dr 96 000
Business combination valuation reserve Dr 20 000
Shares in Shark Ltd Cr 472 000
The next step is to prepare the adjustment entries for intragroup transactions.
3. Profit in ending inventories
Sales Dr 50 000
Workings
• The transaction on 1 January 2023 involving Shark Ltd selling inventories to Bull Ltd is a
current period transaction involving inventories still on hand at the end of the current period.
• Sales within the group are $50 000 and should be eliminated.
• The entire profit on the intragroup sale is $20 000 (i.e. $50 000 − $30 000). The inventories
remaining on hand with Bull Ltd at 30 June 2023 are half of the inventories sold intragroup.
Therefore, the unrealised profit is $10 000 and that gives the adjustment to inventories
(i.e. they should be adjusted from half of $50 000 to half of $30 000).
• Cost of sales recorded by the members of the group is $30 000 for Shark Ltd and $25 000 for
Bull Ltd (i.e. half of $50 000, as only half was sold by Bull Ltd); a total of $55 000. Cost
of sales for the group is $15 000 (i.e. half of $30 000, the original cost to the group). The
adjustment to cost of sales is then $40 000. This could also be calculated as a balancing item
having determined the adjustments for sales and inventories (i.e. the difference between the
adjustment to sales of $50 000 and the adjustment to inventories of $10 000).
• As the carrying amount of inventories is reduced by $10 000, a deferred tax asset of $3000
(i.e. 30% × $10 000) is raised. Given there is no deferred tax asset in the worksheet in
figure 28.2, the adjustment can be included in the worksheet as a debit against the deferred
tax liability line item.
Pdf_Folio:1023

4. Sale in prior period of inventories, classified as equipment

Equipment Cr 2 000
Workings
• The intragroup transaction on 1 January 2022 is a prior period transaction involving an
intragroup transfer of an inventories item reclassified as a non-current asset.
• Profit after tax on this intragroup transfer is $1400 (i.e. ($4000 − $2000) × (1 − 30%));
retained earnings (opening balance) needs to be adjusted for this after-tax intragroup profit.
• The adjustment to the non-current asset is the difference between the transfer price and the
original cost (i.e. the intragroup profit).
• As the carrying amount of equipment is reduced by $2000 with no effect on the tax base, a
deferred tax asset of $600 (i.e. 30% × $2000) is raised.
5. Depreciation

Workings
• The adjustment to the depreciation expense per annum is the depreciation rate applied by the
current owner, Bull Ltd, times the intragroup profit (i.e. 5% × $2000 = $100). The adjustment
to current depreciation expense (i.e. 1 full year worth of depreciation expense adjustment,
$100) will be posted against the depreciation expense account, while the adjustment to
depreciation expenses of prior periods (i.e. only half a year worth of depreciation expense
adjustment as the asset was with Bull Ltd only for half a year in the prior period) will be
posted against the retained earnings (opening balance).
• The tax effect adjustment for depreciation is equal to the tax rate multiplied by the adjustment
for depreciation presented above. The tax adjustment for current depreciation expense will
be posted against the income tax expense account by debiting it with $30 (i.e. 30% × $100),
while the tax adjustment for depreciation expenses of prior periods will be posted against
the retained earnings (opening balance) by debiting it with $15 (i.e. 30% × $50). A credit to
deferred tax asset will also be posted equal to the tax rate multiplied by the total adjustment
to current and prior depreciation expenses (i.e. 30% × ($100 + $50)) to reverse a part of the
deferred tax asset recognised as a result of the profit on sale.
6. Profit on sale of land in previous period

Land Cr 20 000
Workings
• The intragroup transaction during the period ended 30 June 2021 is a prior period transaction
involving the sale of a non-current asset.

• Profit after tax on this intragroup sale recorded in the prior period is $14 000
(i.e. $20 000 × (1 – 30%)); retained earnings (opening balance) needs to be adjusted for
this after-tax intragroup profit.
• The adjustment to land is $20 000, equal to the before-tax profit on the intragroup sale, which
gives rise to a deferred tax asset of $6000 (30% × $20 000).
7. Profit in beginning inventories

Income tax expense Dr 1 800
Pdf_Folio:1024

Workings
• The intragroup transaction addressed here is a prior period transaction involving inventories
still on hand at the beginning of the current period.
• Profit after tax remaining in inventories at 1 July 2022 is $4200 (i.e. $6000 × (1 – 30%));
retained earnings (opening balance) needs to be adjusted for this after-tax unrealised profit.
• The adjustment to cost of sales is $6000, equal to the before-tax profit remaining in inventories
held at the beginning of the period.
• The adjustment to income tax expense is the tax rate times the adjustment to cost of sales
(i.e. $1800).
8. Dividend paid
The financial statements in figure 28.2 show that Bull Ltd has recorded dividend revenue of
$5000, while Shark Ltd has recorded dividend paid of $5000. The consolidation worksheet
entry is as follows.

Dividend paid Cr 5 000
Workings
• This is a current period transaction involving intragroup dividends paid.
• This consolidation adjustment entry eliminates the revenue raised by Bull Ltd and the dividend
paid recognised by Shark Ltd. From the group’s point of view, there are no revenues and no
reduction in retained earnings caused by these dividends.
9. Loan: Bull Ltd to Shark Ltd
The financial statements in figure 28.2 show that Bull Ltd has recorded loan receivable of $5000,
while Shark Ltd has recorded loan payable of $5000. The consolidation worksheet entry is as
follows.
Loan payable to Bull Ltd Dr 5 000

Loan receivable from Shark Ltd Cr 5 000
Workings
• The loan may have been made in a previous period or the current period. The consolidation
worksheet entry will be the same: this entry eliminates the receivable raised by the parent
and the payable raised by the subsidiary. From the group’s point of view, there are no loans
payable or receivable to entities external to the group.
10. Interest on loan
The financial statements in figure 28.2 show that Bull Ltd has recorded interest revenue of $500,
while Shark Ltd has recorded interest expense of $500. The consolidation worksheet entry is
as follows.
Interest revenue from Shark Ltd Dr 500

Interest expense to Bull Ltd Cr 500
Workings
• This intragroup transaction is a current period transaction involving interest payments.
• Bull Ltd records interest revenue of $500 and Shark Ltd records interest expense of $500.
No interest was incurred or earned by the group from entities external to the group, so these
accounts must be eliminated on consolidation.

11. Service: Bull Ltd to Shark Ltd
The financial statements in figure 28.2 show that Bull Ltd has recorded service revenue of
$5000, while Shark Ltd has recorded service expense of $5000. The consolidation worksheet
entry is as follows.
Service revenue from Shark Ltd Dr 5 000

Service expense to Bull Ltd Cr 5 000
Pdf_Folio:1025

Workings
• This is a current period transaction involving intragroup services.
• This consolidation adjustment entry eliminates the revenue raised by Bull Ltd and the expense
raised by Shark Ltd. From the group’s point of view, there are no revenues earned or expenses
incurred.
Figure 28.2 shows the completed worksheet for preparation of the consolidated financial state-
ments of Bull Ltd and its subsidiary Shark Ltd at 30 June 2023.
Once the effects of all adjustments are added or subtracted horizontally in the worksheet to
calculate figures in the right-hand ‘group’ column, the consolidated financial statements can be
prepared, as shown in figure 28.3(a), (b) and (c).
FIGURE 28.2 Consolidation worksheet
Adjustments
Financial statements Bull Ltd Shark Ltd Dr Cr Group
Sales revenue $1 190 500 $ 933 500 3 $50 000 $ 2 074 000
Cost of sales (888 000) (670 000) $40 000 3 (1 512 000)
6 000 7
Wages and salaries (62 500) (32 000) (94 500)
Depreciation (5 200) (4 800) 100 5 (9 900)
Service expense to
Bull Ltd 0 (5 000) 5 000 11 0
Interest expense to
Bull Ltd 0 (500) 500 10 0
Other expenses (4 000) 0 (4 000)
Total expenses (959 700) (712 300) (1 620 400)
Service revenue from
Shark Ltd 5 000 0 11 5 000 0
Interest revenue from
Shark Ltd 500 0 10 500 0
Dividend revenue 5 000 0 8 5 000 0
Profit before income
tax 241 300 221 200 453 600
Income tax expense (97 120) (118 480) 5 30 3 000 3 (214 430)
7 1 800
Profit for the period 144 180 102 720 239 170
Retained earnings
(1/7/22) 100 820 70 280 2 56 000 50 5 95 535
4 1 400
5 15
6 14 000
7 4 200
245 000 173 000 334 705
Dividend paid (80 000) (5 000) 5 000 8 (80 000)
Retained earnings
(30/6/23) 165 000 168 000 254 705
Share capital 500 000 300 000 2 300 000 500 000
Business combination
valuation reserve 2 20 000 20 000 1 —
General reserve 135 000 96 000 2 96 000 135 000
800 000 564 000 889 705
Other components of
equity (1/7/22) 4 000 12 000 16 000
Gains on financial
assets 1 000 6 000 7 000
Other components of
equity (30/6/23) 5 000 18 000 23 000
Total equity 805 000 582 000 912 705
Loan payable to
Bull Ltd 0 5 000 9 5 000 0
Pdf_Folio:1026

Deferred tax
liability 52 000 30 000 3 3 000 45 5 72 445
4 600
6 6 000
Total equity and
liabilities $ 857 000 $ 617 000 $ 985 150
Shares in Shark Ltd $ 472 000 $ 0 $472 000 2 $ 0
Cash 75 000 78 000 153 000
Inventories 168 000 36 000 10 000 3 194 000
Other current assets 10 000 300 000 310 000
Loan receivable from
Shark Ltd 5 000 0 5 000 9 0
Financial assets 15 000 68 000 4 83 000
Plant and equipment 52 000 28 000 2 000 78 000
Accumulated
depreciation —
plant and
equipment (10 000) (13 000) 5 $ 150 (22 850)
Land 70 000 120 000 20 000 6 170 000
Goodwill 0 0 1 20 000 20 000
$ 857 000 $ 617 000 $578 195 $578 195 $ 985 150
FIGURE 28.3 (a) Consolidated statement of profit or loss and other comprehensive income
BULL LTD
Consolidated statement of profit or loss and other comprehensive income
for the period ended 30 June 2023
Sales revenue $ 2 074 000
Cost of sales (1 512 000)
Gross profit 562 000
Wages and salaries (94 500)
Depreciation expense (9 900)
Other expenses (4 000)
Total expenses (108 400)
Profit before income tax 453 600
Income tax expense (214 430)
Profit for the period 239 170
Other comprehensive income
Gain on financial assets 7 000
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $ 246 170
FIGURE 28.3 (b) Consolidated statement of changes in equity
BULL LTD
Consolidated statement of changes in equity
Total comprehensive income for the period $246 170

Retained earnings at 1 July 2022 $ 95 535
Profit for the period 239 170
Dividend paid (80 000)
Retained earnings at 30 June 2023 $254 705
General reserve at 1 July 2022 $135 000
General reserve at 30 June 2023 $135 000
Pdf_Folio:1027

BULL LTD
Consolidated statement of changes in equity
Other components of equity at 1 July 2022 $ 16 000
Increases in financial assets 7 000
Other components of equity at 30 June 2023 $ 23 000
Share capital at 1 July 2022 $500 000
Share capital at 30 June 2023 $500 000
FIGURE 28.3 (c) Consolidated statement of financial position
BULL LTD
Consolidated statement of financial position
as at 30 June 2023
Current assets
Cash $153 000
Inventories 194 000
Other current assets 310 000
Total current assets 657 000
Non-current assets
Financial assets 83 000
Plant and equipment $ 78 000
Accumulated depreciation — plant and equipment (22 850) 55 150
Land 170 000
Goodwill 20 000
Total non-current assets 328 150
Total assets 985 150
Non-current liabilities
Deferred tax liability 72 445
Net assets $912 705
Equity
Other components of equity 23 000
Total equity $912 705
COMPREHENSION QUESTIONS
1 Why is it necessary to make adjustments for intragroup transactions?
2 Why is it important to identify intragroup transactions as current or previous period transactions?
3 In making consolidation worksheet adjustments for intragroup transactions, sometimes tax-effect
entries are made. Why?
4 What are the key questions to consider when preparing consolidation worksheet adjustments for
intragroup transactions?
5 What is meant by ‘realisation of intragroup profits or losses’?
6 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.

7 When are profits realised in relation to inventories transfers within the group?
8 Where a current period intragroup transaction involves a depreciable asset, why is depreciation expense
adjusted?
9 Where a previous period intragroup transaction involves a depreciable asset, why is retained earnings
adjusted?
10 When are profits realised on transfers of depreciable assets within the group?
11 Are tax effect-entries required when adjusting for intragroup services or intragroup borrowings?
Explain.
12 Are adjustments for post-acquisition intragroup dividends different from those for pre-acquisition
intragroup dividends? Explain.
Pdf_Folio:1028

CASE STUDY 28.1
CONSOLIDATION ADJUSTMENTS
Janelle Ltd sold inventories during the current period to its wholly owned subsidiary, Adam Ltd, for
$15 000. These items previously cost Janelle Ltd $12 000. Adam Ltd subsequently sold half the items
to Nambour Ltd, an external entity, for $8000. The income tax rate is 30%.
The group accountant for Janelle Ltd, Bob Jones, maintains that the appropriate consolidation adjust-
ment entries are as follows.
Sales Dr 15 000
Required
1. Discuss whether the entries suggested by Bob Jones are correct, explaining on a line-by-line basis the
correct adjustment entries.
2. Determine the consolidation worksheet entries in the following period, assuming the remaining
inventories are on-sold to external parties, and explain the adjustments on a line-by-line basis.
CASE STUDY 28.2

DEPRECIATION EXPENSE
At the beginning of the current period, Janelle Ltd sold a depreciable asset to its wholly owned subsidiary,
Adam Ltd, for $80 000. Janelle Ltd had originally paid $200 000 for this asset, and by the time of sale to
Adam Ltd had charged accumulated depreciation of $150 000. This asset is used differently in Adam Ltd
from how it was used in Janelle Ltd; thus, whereas Janelle Ltd used a 10% p.a. straight-line depreciation
method, Adam Ltd uses a 20% p.a. straight-line depreciation method.
In calculating the depreciation expense for the consolidated group (as opposed to that recorded by
Adam Ltd), the group accountant, Roger Moore, is unsure of which amount the depreciation rate should
be applied to ($200 000, $50 000 or $80 000) and which depreciation rate to use (10% or 20%).
Required
Provide a detailed response, explaining which depreciation rate should be used and to what amount it
should be applied.
APPLICATION AND ANALYSIS EXERCISES

⋆ BASIC | ⋆ ⋆ MODERATE | ⋆ ⋆ ⋆ DIFFICULT
28.1 Current and prior periods intragroup transfers of inventories ⋆ LO2, 3
Joey Ltd owns all of the share capital of Chandler Ltd. The income tax rate is 30%. The following
transactions took place during the periods ended 30 June 2022 or 30 June 2023.
(a) In January 2023, Joey Ltd sells inventories to Chandler Ltd for $45 000 in cash. The inventories
had previously cost Joey Ltd $30 000, and remain unsold by Chandler Ltd at the end of the
period.
(b) In February 2023, Joey Ltd sells inventories to Chandler Ltd for $51 000 in cash. These
inventories had previously cost Joey Ltd $36 000 and are on-sold externally on 2 April 2023.
(c) In February 2023, Chandler Ltd sells inventories to Joey Ltd for $66 000 in cash (original cost
to Chandler Ltd was $48 000) and half are on-sold externally by 30 June 2023.
(d) In March 2023, Joey Ltd sold inventories for $30 000 to Zara Ltd, an external entity. These
inventories were transferred from Chandler Ltd on 1 June 2022. The inventories had originally
cost Chandler Ltd $18 000, and were sold to Joey Ltd for $36 000.
Required
In relation to the above intragroup transactions:
1. prepare adjusting journal entries for the consolidation worksheet at 30 June 2023
2. explain in detail why you made each adjusting journal entry.
Pdf_Folio:1029

28.2 Current and prior periods intragroup transfers of inventories ⋆ LO2, 3
Monica Ltd owns all the share capital of Phoebe Ltd. The income tax rate is 30%. The following
(a) On 1 May 2022, Monica Ltd sold inventories to Phoebe Ltd for $5000 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
1. prepare adjusting journal entries for the consolidation worksheet at 30 June 2022 and
30 June 2023
28.3 Current and prior periods intragroup transfers of non-current assets ⋆ LO2, 4
Sophie Ltd owns all the share capital of Ruby Ltd. The income tax rate is 30%. The following
(a) On 1 July 2021, Sophie Ltd sold a motor vehicle to Ruby Ltd for $15 000. This had a carrying
amount to Sophie Ltd of $12 000. Both entities depreciate motor vehicles at a rate of 10% p.a.
on cost.
(b) Ruby Ltd manufactures items of machinery which are used as property, plant and equipment
by other companies, including Sophie Ltd. On 1 January 2022, Ruby Ltd sold such an item to
Sophie Ltd for $62 000, its cost to Ruby Ltd being only $55 000 to manufacture. Sophie Ltd
charges depreciation on these machines at 20% p.a. on the diminishing value.
(c) Sophie Ltd manufactures certain items which it then markets through Ruby Ltd. During the
period ended 30 June 2023, Sophie Ltd sold for $12 000 items to Ruby Ltd at cost plus 20%.
By 30 June 2023, Ruby Ltd has sold to external entities 75% of these transferred items.
(d) Ruby Ltd also sells second-hand machinery. Sophie Ltd sold one of its depreciable assets
(original cost $40 000, accumulated depreciation $32 000) to Ruby Ltd for $5000 on 1 January
2023. Ruby Ltd had not on-sold the item by 30 June 2023.
(e) Ruby Ltd sold a depreciable asset (carrying amount of $22 000) to Sophie Ltd on 1 January 2022
for $25 000. Both entities charge depreciation in relation to these items at a rate of 10% p.a. On
31 December 2022, Sophie Ltd sold this asset to Dubbo Ltd, an external entity, for $20 000.
Required
30 June 2023
28.4 Current and prior periods intragroup transfers of non-current assets ⋆ ⋆ LO2, 4
Fred Ltd owns all the share capital of Wilma Ltd. The income tax rate is 30%. The following
(a) Wilma Ltd sold some land to Fred Ltd in December 2021. The land had originally cost
Wilma Ltd $25 000, but was sold to Fred Ltd for only $20 000. To help Fred Ltd pay for the
land, Wilma Ltd gave Fred Ltd an interest-free loan of $12 000, and the balance was paid in
cash. The land was sold to external entities in June 2022 for $30 000 and immediately after that,
Fred Ltd paid the amount owed to Wilma Ltd.
(b) On 1 July 2021, Fred Ltd sold equipment costing $10 000 to Wilma Ltd for $12 000. Fred Ltd
had not charged any depreciation on the asset before the sale as it just purchased it from an
external entity. Both entities depreciate items of equipment at 10% p.a. on cost. The equipment
is still held by Wilma Ltd at 30 June 2023.
(c) On 1 July 2021, Wilma Ltd sold a building to Fred Ltd for $200 000 in cash. This item had
an original cost of $500 000 and accumulated depreciation for Wilma Ltd at time of sale of
$250 000. The remaining useful life of that building is estimated to be 10 years and the future
Pdf_Folio:1030

economic benefits are assumed to be derived consistently throughout the life. The building was
sold to external entities on 1 April 2023 for $210 000.
(d) On 1 July 2022, Fred Ltd sold an item regarded as equipment, to Wilma Ltd which regarded it
as inventories. At the time of the sale, the carrying amount of the item to Fred Ltd was $5000
and it was sold to Wilma Ltd for $4000. The item is sold to an external entity by Wilma Ltd by
30 June 2023.
(e) On 1 October 2022, Fred Ltd sold an item of machinery to Wilma Ltd for $6000. This item had
cost Fred Ltd $4000. Fred Ltd regarded this item as inventories whereas Wilma Ltd intended
to use it as a non-current asset. Wilma Ltd charges depreciation at the rate of 10% p.a. on cost.
The machine was sold to external entities on 1 April 2023 for $5000.
Required
30 June 2023
28.5 Current period intragroup transfers of inventories and non-current assets ⋆ LO2, 3, 4
Rachel Ltd owns all the share capital of Green Ltd. The income tax rate is 30%. During the period
ended 30 June 2023, the following transactions took place.
(a) Green Ltd sold inventories costing $75 000 to Rachel Ltd. Green Ltd recorded a $15 000 profit
before tax on these transactions. At 30 June 2023, Rachel Ltd has none of these goods still
on hand.
(b) Rachel Ltd sold inventories costing $12 000 to Green Ltd for $27 000. By 30 June 2023, one-
third of these were sold to Willow Ltd for $14 250 and one-third to Layla Ltd for $13 500; the
rest are still on hand with Green Ltd. Willow Ltd and Layla Ltd are external entities.
(c) On 1 January 2023, Rachel Ltd sold land for cash to Green Ltd at $30 000 above cost. The land
is still on hand with Green Ltd.
(d) Green Ltd sold a warehouse to Rachel Ltd for $150 000 on 1 July 2022. The carrying amount of
this warehouse recognised by Green Ltd at the time of sale was $123 000. Rachel Ltd charges
depreciation at a rate of 5% p.a. on cost.
Required
1. prepare adjusting journal entries for the consolidation worksheet at 30 June 2023
28.6 Current and prior period intragroup services ⋆ LO2, 5
Darcy Ltd owns all the share capital of Isabella Ltd. The following intragroup transactions took
place during the periods ended 30 June 2022 or 30 June 2023.
(a) Isabella Ltd paid $20 000 during the period ended 30 July 2022 and $40 000 during the period
ended 30 June 2023 as management fees for services provided by Darcy Ltd.
(b) Isabella Ltd rented a spare warehouse to Darcy Ltd starting from 1 July 2021 for 1 year. The
total charge for the rental was $30 000, and Darcy Ltd paid this amount to Isabella Ltd on
1 January 2022.
(c) Isabella Ltd rented a spare warehouse from Darcy Ltd for $50 000 p.a. The rental contract
started at 1 January 2022, and the payments are made annually in advance on 1 January.
Required
30 June 2023
28.7 Current and prior period intragroup dividends ⋆ LO2, 6
Maggie Ltd owns all the share capital of Taylor Ltd. The following intragroup transactions took
place during the periods ended 30 June 2022 or 30 June 2023.
(a) During the period ended 30 June 2022, Taylor Ltd paid an interim dividend of $40 000 out of
pre-acquisition profits. As a result, the investment in Taylor Ltd is considered to be impaired
by $40 000.
(b) On 30 June 2022, Taylor Ltd declared a final dividend of $25 000 out of post-acquisition profits.
Pdf_Folio:1031

(c) During the period ended 30 June 2023, Taylor Ltd paid an interim dividend of $30 000 out of
post-acquisition profits.
(d) On 30 June 2023, Taylor Ltd declared a final dividend of $50 000 out of post-acquisition profits.
Required
30 June 2023
28.8 Current and prior period intragroup debentures ⋆ ⋆ LO2, 7
Ross Ltd owns all the share capital of Geller Ltd. The following transactions are independent.
(a) On 1 January 2022, Geller Ltd issues 20 000 debentures at the nominal value of $20 with an
interest rate of 8% p.a., payable half-yearly on 30 June and 31 December each year. Debentures
are to be redeemed after 3 years. Ross Ltd takes 100% of the debentures issued.
(b) On 1 January 2022, Geller Ltd issues 20 000 debentures at the nominal value of $20 with an
are to be redeemed after 3 years. Ross Ltd takes 50% of the debentures issued.
(c) On 1 January 2022, Geller Ltd issues 20 000 debentures at the nominal value of $20 with an
are to be redeemed after 3 years. Ross Ltd takes 25% of the debentures issued. On 31 March
2022, Ross Ltd acquired another 25% of these debentures cum div. on the open market for
$9 each.
Required
30 June 2023
28.9 Current and prior period intragroup borrowings ⋆ LO2, 7
Tony Ltd owns all the share capital of Sean Ltd. The following transactions are independent.
(a) Sean Ltd gives $50 000 as an interest-free loan to Tony Ltd on 1 July 2021. Tony Ltd made a
$20 000 repayment by 30 June 2022.
(b) Sean Ltd borrows $50 000 from Tony Ltd on 1 July 2021 with an interest rate of 6% p.a. The
interest is to be paid annually in arrears, starting on 30 June 2022.
(c) Sean Ltd borrows $50 000 from Tony Ltd on 31 December 2021 with an interest rate of 6% p.a.
The interest is to be paid annually in advance, starting on 31 December 2021.
(d) Sean Ltd borrows $50 000 from Tony Ltd on 31 December 2021 with an interest rate of 6% p.a.
The interest is to be paid biannually in arrears, starting on 30 June 2022.
(e) Sean Ltd borrows $50 000 from Tony Ltd on 1 July 2021 with an interest rate of 6% p.a. The
interest is to be paid biannually in advance, starting on 1 July 2021.
Required
30 June 2023
28.10 Intragroup transfers of inventories, non-current assets, services and dividends ⋆ LO2, 3, 4, 5, 6
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 these inventories were unsold by Anne Ltd at 30 June 2021 to external
entities, 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.
Pdf_Folio:1032

(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
30 June 2023
28.11 Intragroup transfers of inventories, non-current assets, services
and borrowings ⋆ ⋆ LO2, 3, 4, 5, 7
Kaitlyn Ltd owns all the share capital of Eve Ltd. The income tax rate is 30%. The following
(a) On 1 May 2022, Eve Ltd sold inventories costing $600 to Kaitlyn Ltd for $1200 on credit. On
30 June 2022, only half of these goods had been sold by Kaitlyn Ltd to external entities, and
Kaitlyn Ltd had paid $600 to Eve Ltd. All remaining inventories were sold to external entities
by 30 June 2023 and Kaitlyn Ltd paid the outstanding amount to Eve Ltd on 5 May 2023.
(b) On 1 January 2022, Kaitlyn Ltd sold an item of plant to Eve Ltd for $10 000. Immediately before
the sale, Kaitlyn Ltd had the item of plant on its accounts for $12 000. Kaitlyn Ltd depreciated
items at 5% p.a. on the diminishing balance and Eve Ltd used the straight-line method over
10 years.
(c) An inventories item with a cost of $4000 was sold by Kaitlyn Ltd to Eve Ltd for $3600 on
1 January 2023. Eve Ltd intended to use this item as equipment. Both entities charge deprecia-
tion at the rate of 10% p.a. on the diminishing balance on non-current assets. The item was still
on hand at 30 June 2023.
(d) Kaitlyn Ltd provided management services to Eve Ltd during the period ended 30 June 2023.
The total charge for those services was $5000, and that was unpaid at 30 June 2023.
(e) Kaitlyn Ltd borrows $60 000 from Eve Ltd on 1 July 2021 with an interest rate of
6% p.a. The loan is for 5 years. The interest is to be paid biannually in arrears, starting on
31 December 2021.
Required
30 June 2023
28.12 Consolidation worksheet with pre-acquisition equity transfers and
intragroup transactions ⋆ LO3, 4, 5, 6, 7
On 1 January 2020, Olivia Ltd acquired all the share capital of Chloe Ltd for $300 000. The equity
of Chloe Ltd at 1 January 2020 was as follows.

At this date, all identifiable assets and liabilities of Chloe Ltd were recorded at fair value.
On 1 May 2023, Chloe Ltd transferred $15 000 from the general reserve (pre-acquisition) to
retained earnings. The income tax rate is 30%.
The following information has been provided about transactions between the two entities.
(a) The beginning and ending inventories of Olivia Ltd and Chloe Ltd in relation to the current
period ended on 31 December 2023 included the following inventories transferred intragroup.
Pdf_Folio:1033

Olivia Ltd Chloe Ltd
Beginning inventories:
Transfer price $2 000 $1 200
Original cost 1 400 800
Ending inventories:
Transfer price 500 900
Original cost 300 700
Olivia Ltd sold inventories to Chloe Ltd during the current period for $3000. This was $500
above the cost of the inventories to Olivia Ltd. Chloe Ltd sold inventories to Olivia Ltd in the
current period for $2500, recording a pre-tax profit of $800.
(b) Olivia Ltd sold an inventories item to Chloe Ltd on 1 July 2023 for use as machinery. The item
cost Olivia Ltd $4000 and was sold to Chloe Ltd for $6000. Chloe Ltd depreciated the item at
a rate of 10% p.a. on cost.
(c) On 31 December 2023, Chloe Ltd owes Olivia Ltd $1000 for items sold on credit.
(d) Chloe Ltd undertook an advertising campaign for Olivia Ltd during the period ended
31 December 2023. Olivia Ltd was charged and paid $8000 to Chloe Ltd for this service.
(e) Olivia Ltd received dividends totalling $63 000 during the current period ended
31 December 2023 from Chloe Ltd. These dividends were declared in the current period
out of post-acquisition profits.
Required
1. Prepare the acquisition analysis at 1 January 2020.
2. Prepare the business combination valuation entries and pre-acquisition entries at 1 January 2020.
3. Prepare the business combination valuation entries and pre-acquisition entries at
31 December 2023.
4. Prepare the consolidation worksheet journal entries to eliminate the effects of intragroup
transactions at 31 December 2023.
28.13 Consolidation with differences between carrying amount and fair value at acquisition date,
impairment of goodwill and intragroup transactions ⋆ LO1, 2, 3, 4, 5, 6, 7
Financial information for Skye Ltd and its 100% owned subsidiary, Blue Ltd, for the period ended
31 December 2023 is provided below.
Skye Ltd Blue Ltd
Sales revenue $50 000 $47 200
Dividend revenue 2 000 0
Gain on sale of property, plant and equipment 2 000 4 000
Other income 2 000 4 000
Total income 56 000 55 200
Cost of sales 42 000 36 000
Other expenses 6 000 2 000
Total expenses 48 000 38 000
Profit before income tax 8 000 17 200
Income tax expense 2 700 3 900
Profit for the period 5 300 13 300
Retained earnings (1/1/23) 12 000 6 000
17 300 19 300
Interim dividend paid 5 000 2 000
Retained earnings (31/12/23) $12 300 $17 300
Skye Ltd acquired its shares in Blue Ltd at 1 January 2023 for $40 000 on a cum div. basis. At
that date, Blue Ltd recorded share capital of $20 000. Blue Ltd had declared prior to the acquisition
a dividend of $6000 that was paid in March 2023.
At 1 January 2023, all identifiable assets and liabilities of Blue Ltd were recorded at fair value
except for inventories, for which the carrying amount was $800 less than fair value. Some of the
inventories have been a little slow to sell, and 10% of it is still on hand at 31 December 2023.
Inventories on hand in Blue Ltd at 31 December 2023 also includes some items acquired from
Skye Ltd during the period ended 31 December 2023. These were sold by Skye Ltd for $10 000, at
a profit before tax of $2000.
Pdf_Folio:1034

Half of the goodwill on acquisition of Blue Ltd by Skye Ltd was written off as the result of an
impairment test on 31 December 2023.
During March 2023, Skye Ltd provided some management services to Blue Ltd at a fee of $1000
paid by 31 December 2023.
On 1 July 2023, Blue Ltd sold machinery to Skye Ltd at a gain of $4000. This machinery had a
carrying amount to Blue Ltd of $40 000, and was considered by Skye Ltd to have a further 5-year
useful life.
By 31 December 2023, the financial assets acquired by Skye Ltd and Blue Ltd from external
entities increased in value by $2000 and $1300 respectively with gains and losses being recognised
in other comprehensive income.
The income tax rate is 30%.
Required
1. Prepare the acquisition analysis at 1 January 2023.
2. Prepare the business combination valuation entries and pre-acquisition entries at 1 January 2023.
3. Prepare the business combination valuation entries and pre-acquisition entries at
31 December 2023.
transactions at 31 December 2023.
5. Discuss the concept of ‘realisation’ using the intragroup transactions in this question to illustrate
the concept.
6. Prepare the consolidation worksheet for the preparation of the consolidated financial statements
for the period ended 31 December 2023.
7. Prepare the consolidated statement of profit or loss and other comprehensive income for Skye Ltd
and its subsidiary, Blue Ltd, at 31 December 2023.
28.14 Consolidation with differences between carrying amount and fair value at
acquisition date and intragroup transactions ⋆ LO3, 4, 5, 6, 7
Waltzing Ltd purchased 100% of the shares of Matilda Ltd on 1 July 2020 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 2020, all the identifiable assets and liabilities of Matilda Ltd were recorded at fair value
except for the following.
Carrying amount Fair value

Inventories $ 3 000 $ 3 500
Plant and equipment (cost $80 000) 60 000 61 000
All of the inventories were sold by December 2020. The plant and equipment had a further
5-year useful life. Any valuation adjustments are made on consolidation.
Financial information for Waltzing Ltd and Matilda Ltd for the period ended 30 June 2022 is
as follows.

Sales revenue $39 000 $20 000
Dividend revenue 2 200 800
Total income 41 200 20 800
Cost of sales 30 000 15 000
Other expenses 5 400 2 500
Total expenses 35 400 17 500
Gross profit 5 800 3 300
Gain on sale of furniture 0 250
Profit before income tax 5 800 3 550
Income tax expense 1 500 1 100
Pdf_Folio:1035

Profit for the period 4 300 2 450
Retained earnings (1/7/21) 7 250 1 400
11 550 3 850
Interim dividend paid 2 000 1 000
Final dividend declared 4 000 1 200
6 000 2 200
Retained earnings (30/6/22) $ 5 500 $ 1 650
Additional information
• Waltzing Ltd records dividend receivable as revenue when dividends are declared.
• The beginning inventories of Matilda Ltd at 1 July 2021 included goods which cost Matilda Ltd
$1000. Matilda Ltd purchased these inventories from Waltzing Ltd at cost plus 33% mark-up.
• Intragroup sales totalled $5000 for the period ended 30 June 2022. Sales from Waltzing Ltd
to Matilda Ltd, at cost plus 10% mark-up, amounted to $2800. The ending inventories of
Waltzing Ltd included goods which cost Waltzing Ltd $2200. Waltzing Ltd purchased these
inventories from Matilda Ltd at cost plus 10% mark-up.
• On 31 December 2021, Matilda Ltd sold Waltzing Ltd office furniture for $1500. This furniture
originally cost Matilda Ltd $1500 and was written down to $1250 just before the intragroup sale.
Waltzing Ltd depreciates furniture at the rate of 10% p.a. on cost.
• The asset revaluation surplus relates to land. The following movements occurred in this account.

1 July 2020 to 30 June 2021 $1 500 $(250)
1 July 2021 to 30 June 2022 1 000 250
• The income tax rate is 30%.

Required
1. Prepare the acquisition analysis at 1 July 2020.
2. Prepare the business combination valuation entries and pre-acquisition entries at 1 July 2020.
3. Prepare the business combination valuation entries and pre-acquisition entries at 30 June 2022.
transactions at 30 June 2022.
5. Prepare the consolidation worksheet for the preparation of the consolidated financial statements
for the period ended 30 June 2022.
6. Prepare the consolidated statement of profit or loss and other comprehensive income for the
period ended 30 June 2022.
ACKNOWLEDGEMENTS
Photo: © wavebreakmedia / Shutterstock.com
Photo: © Brand X / Getty Images
Text: © 2019 Australian Accounting Standards Board (AASB). The text, graphics and layout of this
publication are protected by Australian copyright law and the comparable law of other countries. No part
of the publication may be reproduced, stored or transmitted in any form or by any means without the prior
written permission of the AASB except as permitted by law. For reproduction or publication, permission
should be sought in writing from the AASB. Requests in the first instance should be addressed to
the National Director, Australian Accounting Standards Board, PO Box 204, Collins Street West,
Victoria 8007.
Text: © IFRS. This publication contains copyright material of the IFRS Foundation in respect of which
all rights are reserved. Reproduced by John Wiley & Sons Australia, Ltd with the permission of the
IFRS Foundation. No permission granted to third parties to reproduce or distribute. For full access to
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Accounting Standards Board, the IFRS Foundation, the authors and the publishers do not accept
responsibility for any loss caused by acting or refraining from acting in reliance on the material in
this publication, whether such loss is caused by negligence or otherwise.
Pdf_Folio:1036


Chap 28 Consolidation Intragroup Transactions

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Chap 28 Consolidation Intragroup Transactions

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CHAPTER 28

After studying this chapter, you should be able to:

CONCEPTS FOR REVIEW

28.2 The adjustment process

still present in the individual accounts of the legal entities involved.

992 Financial reporting

CHAPTER 28 Consolidation: intragroup transactions 993

Realisation of intragroup profits or losses

994 Financial reporting

28.3.1 Sales of inventories in the current period

1. Is this a prior period or a current period transaction?

George Ltd would have made the following entry.

CHAPTER 28 Consolidation: intragroup transactions 995

3. What should be reported by the group?

Sum Group Difference

5. What is the tax effect of the adjustments made?

996 Financial reporting

2. What has been recorded by the legal entities?

3. What should be reported by the group?

Cost of sales 8 000

Sum Group Difference

CHAPTER 28 Consolidation: intragroup transactions 997

5. What is the tax effect of the adjustments made?

2. What has been recorded by the legal entities?

3. What should be reported by the group?

998 Financial reporting

5. What is the tax effect of the adjustments made?

Realisation of intragroup profits or losses

Case 1: none sold 100% × $2000 = $2 000

CHAPTER 28 Consolidation: intragroup transactions 999

Case 1: none sold 30% × $2 000 = $600

28.3.2 Sales of inventories in the prior period

Cost of sales Dr 2 000

Laura Ltd George Ltd Sum

1000 Financial reporting

Sum Group Difference

The first consolidation worksheet adjustment entry at 30 June 2022 is as follows.

5. What is the tax effect of the adjustments made?

Realisation of intragroup profits

CHAPTER 28 Consolidation: intragroup transactions 1001

ILLUSTRATIVE EXAMPLE 28.1

Intragroup transactions involving

Retained earnings (1/7/24) Dr 1 120

1002 Financial reporting

28.4 Property, plant and equipment

28.4.1 Sale of property, plant and equipment

CHAPTER 28 Consolidation: intragroup transactions 1003

2. What has been recorded by the legal entities?

3. What should be reported by the group?

Legal entities Group Difference

5. What is the tax effect of the adjustments made?

Income tax expense Cr 150

1004 Financial reporting

1. Is this a prior period or a current period transaction?

2. What has been recorded by the legal entities?

3. What should be reported by the group?

Legal entities Group Difference

The consolidation worksheet adjustment entry at 30 June 2024 is as follows.

5. What is the tax effect of the adjustments made?

CHAPTER 28 Consolidation: intragroup transactions 1005

28.4.2 Depreciation and realisation of profits

1. Is this a prior period or a current period transaction?

2. What has been recorded by the legal entities?

3. What should be reported by the group?