Reference no: EM132939627

Question - You have been auditing the consolidated financial statements of Reynolds Ltd and its wholly owned subsidiary Fisher Ltd. You discover that Reynolds Ltd had bought inventory during the year for $33,750 which it subsequently sold to Fisher Ltd for $40,500. Later in the year one third of the inventory was sold by Fisher Ltd to a non-group company for $16,500.

The accountant's consolidation worksheet had recorded the following adjusting journal entries:

Sales Dr 40,500

Cost of Sales Cr 38,000

Inventories Cr 2,500

Deferred Tax Asset Dr 750

Income Tax Expense Cr 750

Required -

a. Discuss whether the entries suggested by the chief accountant are correct, explaining on a line-by-line basis the adjustment entries.

b. Determine the consolidation worksheet entries in the following year, assuming the inventories are on-sold, and explain the adjustments on a line-by-line basis.