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ACCT7104 Corporate Accounting

Seminar 4 Set Work Questions and Solutions

Arthur et al:
Q4.2 Identify and explain two reasons why intra-group transactions occur within
complex groups. Use an intra-group non-current asset transaction to illustrate your
Students will suggest several reasons. Some of the most common reasons are as follows.
Services or goods are supplied or sold between group entities
For example:
Subsidiary 1 purchases raw materials and sells to subsidiary 2
Subsidiary 2 buys raw materials from subsidiary 1, converts them into finished goods and
sells to the parent entity who is responsible for selling the goods to external parties.
Streamline operations
For example:
One entity in a complex group may own a building which is not part of its core business
activities. As part of a group restructure, the building is transferred to another group entity.

Q4.3 Explain why intra-group transactions are eliminated from consolidated statements
(a) a financial statement users perspective; and
(b) a theoretical perspective.

(a) Financial statement user perspective

Financial statement users require relevant and reliable financial information so as to
assist them with their investment decisions. From the perspective of relevancy,
transactions must be realised and only reflect the transfer of resources between the group
and external parties. From the perspective of reliability, the groups transactions must be
free from bias. The elimination of intragroup transactions removes from the consolidated
financial statements transactions which have been subject to management intervention.
(b) Theoretical perspective
The entity concept of consolidation, which has been adopted by AASB 10, requires
intragroup transactions to be eliminated in full. This concept requires financial
statements to be prepared from the consolidated groups perspective and only
transactions undertaken between the group and external parties are recognised.
Q4.11 On 1 January 20X0 Alpha Ltd incorporated Beta Ltd as a wholly owned
subsidiary. Beta Ltd manufactures components for laptops. Alpha Ltd assembles
laptops and sells them to the public through its distribution chain of retail stores. Beta
Ltd sells components to Alpha Ltd at a markup of 50% on cost. Entities in the Alpha
Ltd group have adopted the perpetual inventory system. The tax rate for all accounting
periods is 30%. Discuss the nature of the consolidation eliminations and adjustments
that are required at 31 December 20X8 for each of the following:
(a) Beta Ltd has made sales to Alpha Ltd of $6.1 million during 20X8 and $5.3 million
during 20X7;
(b) Alpha Ltd has an intragroup payable owing to Beta Ltd amounting to $2.8 million at
the end of 20X8 ($1.3 million at the end of 20X7);
(c) Alpha Ltd holds inventories purchased from Beta Ltd amounting to $1.9 million at
the end of 20X8 ($1.4 million at the end of 20X7);
(d) On 1 January 20X8 Alpha Ltd supplied Beta Ltd with laptops for an office upgrade.
The total transfer price was $920,000 but the cost of manufacture to Alpha Ltd was
$310,000. The laptops have an expected useful life to Beta Ltd of three years.
(a) Sales transactions
Consolidation adjustment to eliminate the intragroup sales of $6.1 million:

Sales revenue $6100000

Cost of goods sold $6100000

No adjustment is required for the 20X7 sales.

(b) Intragroup payables and receivables

Consolidation adjustment to eliminate the intragroup payable and receivable of $2.8 million:

Accounts payable $2800000

Accounts receivable $2800000

No adjustment is required for the 20X7 payables and receivables.

(c) Unrealised profit in opening inventory

Cost price is $1400000/1.5 = $933333
Unrealised profit is $1400000 $933333 = $466667
Tax at 30% = $140000

Retained earnings 1 January 20X8 $326667

Tax expense $140000
Cost of goods sold (opening inventory) $466667

Elimination of intragroup unrealised profit in closing inventory at 31 December 20X8

Cost price is $1900000/1.5 = $1266667
Unrealised profit is $1900000 $1266667 = $633334
Tax at 30% = $190000

Cost of goods sold $633334

Inventories $633334
Deferred tax asset $190000
Tax expense $190000

(d) Intragroup sale of equipment

In the statement of comprehensive income of Alpha Ltd would record sales revenue of
$920000 and cost of goods sold of $310000, with income tax on that transaction 30% of
$610000 = $183000.
In the statement of financial position of Beta Ltd, the equipment is recorded at $920000 and
depreciated over three years. The depreciation in the year ended 31 December 20X8 is one-
third of $920000 = $306667. The income tax effect on the depreciation expense is 30% of
$306667 = $92000.
From the viewpoint of the group, there is equipment of $310000 which is being depreciated
over three years. The depreciation in the year ended 31 December 20X8 is one-third of
$310000 = $103334 on which the income tax effect is 30% of $103334 = $31000.
The unrealised profit after tax of 70% of $610000 = $427000 is earned over the life of the
computers. At 31 December 20X8, the deferred tax asset will be two-thirds of 30% of
$610000 = $122000.
Analysis of the effects of the transaction (amounts in thousands):

Alpha Ltd Beta Ltd Adjustmen Group

Sales revenue $920 Dr 920
Cost of goods sold 310 Cr 310

Depreciation expense 306 Cr 203 103

Tax expense 183 92 Cr 122 31

Equipment 920 Cr 610 310

Accumulated depreciation 306 Dr 203 103
Deferred tax Dr 122 122

Consolidation adjustment to eliminate the unrealised profit on the sale of equipment:

Sales revenue $920000

Cost of goods sold (opening inventory) $310000
Depreciation expense $203000
Tax expense $122000
Equipment $610000
Accumulated depreciationequipment $203000
Deferred tax asset $122000

E4.1, E4.5 and E4.7.

Please refer to Arthur et al for exercise details. Excel spreadsheet solutions are provided
to these exercises. Click on the exercise number on learning pathways to access these