Reference no: EM133110115

Question - The accountant told me that she had eliminated transactions incurred between the companies Amy Ltd and Astra Ltd (Parent and Subsidiary). The sales are legitimate, we have exchanged invoices and contracts, so can you explain why we need to eliminate the inter-company transactions? Would you please examine the following transactions for errors? If incorrect, explain why and provide me with the corrected journal entries.

1. At the beginning of the current period, Amy Ltd sold Equipment to its wholly-owned subsidiary, Astra Ltd, for $320,000. Amy Ltd had initially paid $800,000 for this asset, and at the time of sale to Astra, Ltd had charged depreciation of $600,000. This asset is used differently in Astra Ltd from how it was used in Amy Ltd; thus, whereas Amy Ltd used a 15% p.a. straight-line depreciation method, Astra Ltd uses a 25% straight-line depreciation method. In calculating the depreciation expense for the consolidated group, the group accountant is unsure which depreciation rate should be applied and which depreciation rate to use.

2. On 1 May 2021, Astra Ltd sold inventory for $25,000 to Amy Ltd at cost plus 25%. On 30 June 2021, Amy Ltd sold two-thirds of the inventory to other entities for $25,000 but still holds one third of these inventories as of 30 June 2021. Can we debit Sales for $50,000, credit the Cost of Sales for $25,000 on 30 June 2021? Do we need to do anything else?