1. You are working as an accountant for ABC Group Ltd. Your directors have asked you to prepare the necessary consolidation journal entries for the year ended 30 June 2009 (Narrations are required but journal entries with respect to non-controlling interest are not required).  

2. The majority of the directors do not have an accounting background. You are required to prepare a memo which explains why is it necessary to make adjustments for the inter-company transactions. In your memo you should also refer to two consolidation adjusting entries you have prepared in the consolidation worksheet (600 words).

On 1 July 2006 ABC Ltd acquired 85% of the share capital of XYZ Ltd for $2 975 000.

On the date of control the equity of XYZ Ltd was:

Share capital                                                          1 490 250

General reserve                                                        280 000

Retained earnings                                                   590 600

All assets were acquired at their fair values with the exception of land and plant and equipment. The book value of the land was $400 000 lower than its fair value. The fair value of the equipment was $85 000 higher than its book value and the equipment had 6 years useful life left on 1 July 2006.

The group reviews goodwill for impairment at the end of each year and the following impairments have occurred:

30 June 2007                                                            125 000

30 June 2008                                                                        0

30 June 2009                                                              56 000

On the following two pages are the financial statements for ABC Ltd and XYZ  Ltd for the year ended 30 June 2009, together with additional relevant information which must be addressed in your submission. The tax rate is 30%

Intra group transactions

(1)     On 18 February 2009 ABC Ltd sold goods to XYZ  Ltd for a selling price of $23 000 which included a 25% mark-up on original cost. Included in the inventory of XYZ Ltd at 30 June 2009 was $6 900 of these goods. XYZ  Ltd still owes ABC Ltd 60% of the invoice value at 30 June 2009.

(2)     On 21 September 2008 ABC Ltd purchased from XYZ  Ltd goods which had originally cost XYZ  Ltd $44 000. The selling price of this included a margin of 30%. A total of 80% of these goods had been sold by ABC Ltd to third parties before the year end. In relation to this sale XYZ Ltd is still owed $20 000 from ABC Ltd at 30 June 2009.

(3)     On 11 October 2007 XYZ  Ltd had purchased goods from ABC Ltd which had originally cost ABC Ltd $11 000. The selling price of this included a mark-up of 20%. A total of 70% of these goods was still in the inventory of XYZ Ltd at 30 June 2008 and this was sold by XYZ Ltd during the following year. These goods were paid for at the date of transfer.

(4)     On 8 April 2008 XYZ Ltd sold goods to ABC Ltd for a selling price of $7 000 which included a margin of 40%. ABC Ltd paid XYZ Ltd for these goods on 15 June 2008. Of these goods $4 000 was sold by ABC Ltd to third parties before the 30 June 2008 and the remainder were sold in the year ended 30 June 2009.

(5)     The intra group loans are interest free and the difference in the balances relates to cash paid by XYZ Ltd on 29 June 2009 which was recorded as a receipt by ABC Ltd on 5 July 2009.

(6)     During the year XYZ  Ltd was provided with accounting services from ABC Ltd at a cost of $40 000 which has not yet been paid. The cost is included in XYZ Ltd's expenses and ABC Ltd's other revenue.

(7)     ABC Ltd rents a property from XYZ Ltd. The rentals are included in ABC Ltd's expenses and XYZ Ltd's other revenue. ABC Ltd has rented this property since it acquired XYZ Ltd and all amounts are still owed to XYZ Ltd. The annual rental is $240 000.

(8)     All dividends declared by XYZ Ltd during the year had been declared out of post-acquisition profits. Both ABC Ltd and XYZ Ltd recognise dividend revenue on an accruals basis.