Reference no: EM133006012
Question - Consolidated Financial Statements - intragroup transactions
On 1 July 2019, Yellow Ltd acquired 100% of the equity in Purple Ltd. The following intragroup transactions need to be considered in the preparation of the group's consolidated financial statements for the year ended 30th June 2021:
a) On 1 July 2019, Yellow Ltd sold Purple Ltd $20,000 of inventory for $25,000. Purple Ltd held the inventory as a non-current asset and determined it had a useful life of 10 years with no residual value.
b) During the year ended 30 June 2021, Purple Ltd sold inventory to Yellow Ltd for $140,000. The inventory had previously cost Purple Ltd $80,000. Yellow Ltd still held 25% of this inventory at 30 June 2021.
c) During the year ended 30 June 2021, Yellow Ltd paid $500,000 to Purple Ltd for consulting services provided.
d) Yellow Ltd issued 1,000 10% debentures of $100 at nominal value on 1 October 2020. Purple Ltd acquired 300 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in each entities' accounts.
The tax rate is 30%.
Required -
1. Prepare the consolidation journal entries at 30 June 2021 to adjust for the effects of the above intragroup transactions.
2. With reference to AASB 10, briefly explain what the term 'control' means. For what purpose are consolidated financial statements prepared?