Reference no: EM132723727

On 1 July 2018, Sunflower Ltd acquired 90% of the share capital to gain control of Palm Ltd. The following intra-group transactions occurred during the year ending 30 June 2019.

(i) During the 2018/2019 period, Sunflower Ltd sold inventory to Palm Ltd for $1,600,000. Sunflower Ltd purchased this inventory at $1,000,000. By 30 June 2019, Palm Ltd had sold 70% of that inventory to a third party.

(ii) Palm Ltd declared a final dividend of $1,300, 000 from current year's profits.

(iii) Palm Ltd paid Sunflower Ltd a fee for administrative services they provided of $40,000.

(iv) Palm Ltd has an intra-group loan with Sunflower Ltd. Sunflower Ltd provided a loan of $10,000,000. The loan charges 4% interest annually. One half of the interest for the current year remains unpaid as at 30 June 2019.

(v) Palm Ltd sold land to Sunflower Ltd for $560,000. The land was purchased by Palm Ltd at $300,000.

Required:

Problem (a) Prepare the journal entries required to eliminate the intra-group transactions above.

Problem (b) When are profits realised in relation to inventory transfers within the group?

Problem (c) What are the rules for the elimination entry for intra-group transactions relating to dividends declared by the parent company and dividends declared by the subsidiary company?