Reference no: EM132670331

Question -

(a) Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows:

Sales Dr 15 000

Cost of Sales Cr 13 000

Inventory Cr 2 000

Deferred Tax Asset Dr 300

Income Tax Expense Cr 300

Required -

(i) Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry.

(ii) Determine the consolidation worksheet entries in the following year, assuming the inventory has been -sold, and explain the adjustments on a line-by-line basis.

(b) On 1 July 2016 Liala Ltd sold an item of plant to Jordan Ltd for $450000 when its' carrying value in Liala Ltd book was $600000 (costs $900000, accumulated depreciation $300000). This plant has a remaining useful life of five (5) years form the date of sale. The group measures its property plants and equipment using a costs model. Tax rate is 30 percent.

Required - Pass the necessary entries on 30 June 2017 and 30 June 2018 to eliminate the intra-group transfer of equipment.