Reference no: EM132714892
Question - 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 -
(a) Prepare the journal entries required to eliminate the intra-group transactions above.
(b) When are profits realised in relation to inventory transfers within the group?
(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?
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