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HI 5020 Corporate Accounting: Session 8b Intra-Group Transactions
HI 5020 Corporate Accounting: Session 8b Intra-Group Transactions
Corporate Accounting
Session 8b
Intra-group Transactions
Session Objectives
•How to account for intra-group sales of
inventory inclusive of related tax expense, and
•How intra-group sales of non-current assets
inclusive of the related tax expense effects are
accounted for.
Intra-group Dividends from Post-acquisition Equity
3
Dividends Declared in the Current Period but not Paid
On 25 June 2014, Sub Ltd declares dividend $7,500
In Sub Ltd, Journals are:
Dividend declared 7,500
Dividend payable 7,500
In Parent Ltd are:
Dividend receivable 7,500
Dividend revenue 7,500
Consolidation adjustment entry (Parent) are:
Dividend payable 7,500
Dividend declared 7,500
Dividend revenue 7,500
Dividend receivable 7,500
4
Dividends Declared & Paid in the Current Period
Sub Ltd declares and pays dividend of $7,500
In Parent Ltd
Cash 7,500
Dividend revenue 7,500
In Sub Ltd
Interim dividend paid 7,500
Cash 7,500
Consolidation adjustment entry
Dividend revenue 7,500
Interim dividend paid 7,500
5
Inventory Adjustments
•Next, the next situation looked at is where an
entity “sells” inventory to another entity, both
part of the same group.
•In the next example, the Parent acquires stock
from the Subsidiary, where the sub applies a
price charge that is the same as their normal
selling price.
•Refer Worked Example: 26.3
•Again, it is not allowable for one entity to
generate a profit from another where the “other”
is part of the same economic entity.
Inventory Adjustments
Worked Example 26.3—Unrealised profit in closing inventory
Big Ltd owns 100 per cent of the shares of Little Ltd
These shares are acquired on 1 July 2018
During the 2019 financial year, Little Ltd sells inventory to Big
Ltd at a sales price of $200 000. The inventory cost Little Ltd
$120 000 to produce
At 30 June 2019, half of the stock is still on hand with Big Ltd.
The tax rate is assumed to be 33 per cent
Inventory Adjustments
Elimination of intragroup sales
Dr Sales 200 000
Cr Cost of goods sold 200 000
Elimination of unrealised profit in closing
inventory
Dr Cost of goods sold 40 000
Cr Inventory 40 000
Inventory Adjustments
Consideration of the tax paid on the sale of inventory that is still held within the
group
From the group’s perspective, $40 000 has not been earned. However, from
Little Ltd’s individual perspective (as a separate legal entity), the full amount of
the sale has been earned
This will attract a tax liability in Little Ltd’s accounts of $26 400 (33 per cent of
$80 000)
However, from the group’s perspective, some of this will represent a
prepayment of tax as the full amount has not been earned by the group even if
Little Ltd is obliged to pay the tax
Dr Deferred tax asset 13 200
Cr Income tax expense 13 200
($40000 × 33%)
Inventory Adjustments (more example)
S Ltd
Cash 10,000
Sales revenue 10,000
Cost of sales 8,000
Inventory 8,000
P Ltd
Inventory 10,000
Cash 10,000
11
Profits in Ending Inventory
1) Transferred inventory still on hand
Assume 30 June 2014 all inventory sold by Sub Ltd
to Parent Ltd is still on hand. The Journal entry is:
12
Profits in Ending Inventory (cont.)
2) Transferred inventory only partially sold
Assume Parent Ltd sold $7,500 of transferred
inventory for $14,000 to external parties, $2,500 on
hand
Sales 10,000
Cost of sales 9,500
Inventory 500
To record sales of inventory(8,000-7,500) sourced from intra-
group transaction.
13
Profits in Ending Inventory (cont.)
3) Transferred inventory completely sold
•Assume Parent Ltd sold all inventory for
$18,000 to external parties
•Profit to the group = selling price to external
parties less cost to group
•$18,000–$8,000 = $10,000
14
Sales of Non-current Assets
Refer Worked example: 26.5
On 1 July 2018, Eddie Ltd acquired a 100 per cent interest in
Sandy Ltd
On 1 July 2018, Eddie Ltd sells an item of plant to Sandy Ltd for
$780 000
This plant cost Eddie Ltd $1 million, is four years old and has
accumulated depreciation of $400 000 at the date of the sale
The remaining useful life of the plant is assessed as six years
The tax rate is 30 per cent
THE END