Activity 2

INTER-ENTITY TRANSACTIONS

Services and Sale of Inventory

Spoke Ltd is a wholly owned subsidiary of Wheel Ltd. The transactions for the
period ending 30 June 2023 are shown below:

Transactions:

1. During the accounting period, Spoke Ltd paid management fees of

$18 000 to Wheel Ltd.

2. Wheel Ltd paid $13 000 to Spoke Ltd for road testing services during the
period.

3. Wheel Ltd sold inventory to Spoke Ltd for $60 000 during the period. This
inventory had originally cost Wheel Ltd $40 000. Spoke Ltd sold ¾ of this
inventory during the period to parties external to the group for $50000. The
remaining ¼ is still held by Spoke Ltd at the end of the period. The tax rate is
assumed to be 30%.
40k
- 20k is unrealized profit as it sold internally in a group ** W (s)
Actual cost of inventory left
is 10k (40k/4) and but for S URP = 20k 60k
it would be 15k (60k/4)
Required: Eliminate the So the closing would be S (p)
closing balance
50k
(a) Using the PERPETUAL inventory system, prepare journal entries (3/4)
for the above transactions.
(b) Prepare the consolidation elimination journal entries.
(c) Prepare the journal entry for subsequent consolidations. Outsider
 Activity 2: STUDENT TEMPLATE
Inter-entity transactions – Spoke & Wheels Ltd

1. Inter-entity transactions: Management fees and Road testing fees

Recorded transactions - Spoke Ltd's books

Date Particulars Debit ($) Credit ($)
2023 80 000
June
30 Management fee expenses
1.
80 000

Cash at Bank

2. Cash at Bank 13 000

Road testing service income 13 000
Recorded transactions - Wheel Ltd’s Books
Date Particulars Debit ($) Credit ($)
2023 Cast at Bank 80 000
June
30
1.
Management fee income 80 000
2. Road testing service expense 13 000
Cash at bank 13 000

Consolidation Journal (Elimination)**

Date Particulars Debit ($) Credit ($)
2023 Management fee income 80 000
June
30
1.
Management fee expense 80 000
2. Road testing service income 13 000
Road testing service expense 13 000
(being consolidated adjustment on
intragroup services)
3. Inter-entity transactions: Sale of Inventory – applying perpetual
system (final only test perpetual)

Perpetual system: continuous update or record dr inventory cr a/c

payable
Dr Inventory 100
Cr a/c payable / cash 100

Dr COS 100
Cr Inventory 100
Dr AR 120
Cr Sales 120

At the end of the year there would be stock a/c and write off on stock
loss for not matching figures

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Physical counting method – record at the year end dr purchases cr

a/c payable

Dr Purchases 100
Cr A/c payable / cash 100

Dr A/c receivable 120

Cr Sales 120

At the end of the year there would be stock a/c

--------------------------------------------------------------------------------------------

¾ of the inventory sold to external party:

Recorded transactions – Spoke Ltd’s books

Date Particulars Dr ($) Cr ($)

2023 Inventory 60 000
June Cash 60 000
30

COS 45 000
Inventory 45 000
Cash 50 000
Sales 50 000
Recorded transactions – Wheel Ltd’s books

2023 Inventory 40 000

June Cash 40 000
30
COS 40 000
Inventory 40 000
Cash 60 000
Sales 60 000

Consolidation Journal (Elimination)

Date Particulars Dr ($) Cr ($)
2023 Eliminate the Sales & COS
June Sales 60 000
30 COS 60 000

Eliminate the unrealized profit

(60 000 – 40 000) * ¼ =5 000
COS ( the COS higher when the closing 5 000
inventory decreases) 5 000
Inventory (URP between Spoke 15 000
and Wheel 10 000 for closing inventory)

Tax effect (higher COS higher costs

lower tax)
Deferred tax asset 1 500
Income tax expenses 1 500
(5 000 x 30%)
 Alternative Consolidation Journal (Elimination) for above
Date Particulars Dr ($) Cr ($)
2023
June
30

Consolidation Journal (Elimination)

Adjustment for subsequent years
2024
June
30