Chapter 29: Intra group transaction Part 2

Exercise 29.7

Current and prior period intragroup dividends

Torokina Ltd owns all the share capital of Redleaf Ltd. The following intragroup
transactions took place during the periods ended 30 June 2023 and 30 June 2024:

(a) During the period ended 30 June 2023, Redleaf Ltd paid an interim dividend of $30
000 out of pre-acquisition profits. As a result, the investment in Redleaf Ltd is
considered to be impaired by $30 000.
(b) On 30 June 2023, Redleaf Ltd declared a final dividend of $35 000 out of post-
acquisition profits.
(c) During the period ended 30 June 2024, Redleaf Ltd paid an interim dividend of $40
000 out of post-acquisition profits.
(d) On 30 June 2024, Redleaf Ltd declared a final dividend of $45 000 out of post-
acquisition profits.

Required
1. Prepare adjusting journal entries for the consolidation worksheet at 30 June 2023
and 30 June 2024. In relation to the intragroup transactions
2. Explain in detail why you made each adjusting journal entry.
(LO2 and LO6)

1. At 30 June 2023, there will only be adjusting entries for transactions (a) and (b) as these
are the only transactions related to the financial period ended on 30 June 2023. At 30 June
2024, there will only be adjusting entries for transactions (a), (c) and (d) as those are the only
transactions that affect the financial statements for the financial period ended on 30 June
2024. The dividend transaction (b) from the period ended 30 June 2023 does not have any
impact on the period ended 30 June 2024 that needs to be adjusted, but transaction (a) has due
to the impairment loss recognised for the investment account.

30 June 2023

(a) Dividend revenue Dr 30 000

Interim dividend paid Cr 30 000

Accum. imp. losses – Shares in Redleaf Ltd Dr 30 000

Impairment losses Cr 30 000

(b) Dividend revenue Dr 35 000

Dividend declared Cr 35 000

Dividend payable Dr 35 000

Dividend receivable Cr 35 000

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30 June 2024

(a) Accum. imp. losses – Shares in Redleaf Ltd Dr 30 000

Retained earnings (1/7/23) Cr 30 000

(c) Dividend revenue Dr 40 000

Interim dividend paid Cr 40 000

(d) Dividend revenue Dr 45 000

Dividend declared Cr 45 000

Dividend payable Dr 45 000

Dividend receivable Cr 45 000

2. Detailed explanations on the adjusting journal entries

30 June 2023:

(a) The adjusting entry eliminates the dividend revenue recognised by Torokina Ltd and the
dividend paid recognised by Redleaf Ltd during the current period. As this adjusting entry
does not have any net impact of the consolidated retained earnings there won’t be any further
adjusting entries in the next period for the dividends paid this current period. Also, for
dividends there are no tax effects that should be recognised or adjusted on consolidation.

As the dividends were paid during the current period, there won’t be a need to eliminate any
dividends payable or dividends receivable. However, given that the dividend paid during the
current period was from pre-acquisition equity and caused an impairment of the investment
account that was recognised in Torokina Ltd’s accounts, this impairment will need to be
eliminated on consolidation in the second adjusting entry (by reversing the entry recognising
the impairment) as it is a direct effect of the intragroup transaction involving dividends. The
impairment will impact retained earnings at the end of the period and therefore there will be
further adjustments in the next periods to eliminate that impairment from the accumulated
impairment losses on the investment account.

(b) The adjusting entry eliminates the dividend revenue recognised by Torokina Ltd and the
dividend declared recognised by Redleaf Ltd during the current period. As this adjusting
entry does not have any net impact of the consolidated retained earnings there won’t be any
further adjusting entries in the next period for the dividends paid this current period. Also, for
dividends there are no tax effects that should be recognised or adjusted on consolidation. As
the dividends were not paid during the current period, there will be a need to eliminate
dividends payable and dividends receivable in the second adjusting entry.

30 June 2024:

(a) As previously mentioned, because the impairment loss recognised as a result of the
dividend paid from pre-acquisition profits impacts retained earnings at 1 July 2023, there will
be further adjustment in this current period to eliminate that impairment from the
accumulated impairment losses on the investment account and from the retained earnings
opening balance.

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(c) A similar explanation is used here as for the first adjusting entry at 30 June 2023 for the
elimination of the intragroup dividend in (a). However, given that in this case the dividend is
from post-acquisition equity, there is no need to post the second adjusting entry that reversed
the impairment of the investment account caused by the dividends in (a).

(d) The same explanation is used here as for the adjusting entry at 30 June 2023 for the
elimination of the intragroup dividend in (b).

Exercise 29.12

Consolidation worksheet with pre-acquisition equity transfers and intragroup

transactions

On 1 January 2022, Kiama Ltd acquired all the share capital of Gerringong Ltd for
$300 000. The equity of Gerringong Ltd at 1 January 2022 was as follows.

At this date, all identifiable assets and liabilities of Gerringong Ltd were recorded at
fair value.
On 1 May 2025, Gerringong Ltd transferred $15 000 from the general reserve (pre-
acquisition) to retained earnings. The income tax rate is 30%.

The following information has been provided about transactions between the two
entities:

(a) The beginning and ending inventories of Kiama Ltd and Gerringong Ltd in relation
to the current period ended on 31 December 2025 included the following inventories
transferred intragroup:
Kiama Ltd Gerringong Ltd
Beginning inventories:
Transfer price $2 000 $1 200
Original cost 1 400 800
Ending inventories:
Transfer price 500 900
Original cost 300 700

Kiama Ltd sold inventories to Gerringong Ltd during the current period for $3 000.
This was $500 above the cost of the inventories to Kiama Ltd. Gerringong Ltd sold
inventories to Kiama Ltd in the current period for $2 500, recording a pre-tax profit of
$800.

(b) Kiama Ltd sold an inventories item to Gerringong Ltd on 1 July 2025 for use as
machinery. The item cost Kiama Ltd $4 000 and was sold to Gerringong Ltd for $6
000. Gerringong Ltd depreciated the item at a rate of 10% p.a. on cost.

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(c) On 31 December 2025, Gerringong Ltd owes Kiama Ltd $1 000 for items sold on
credit.
(d) Gerringong Ltd undertook an advertising campaign for Kiama Ltd during the
period ended 31 December 2025. Kiama Ltd was charged and paid $8 000 to
Gerringong Ltd for this service.
(e) Kiama Ltd received dividends totalling $63 000 during the current period ended 31
December 2025 from Gerringong Ltd. These dividends were declared in the current
period out of post-acquisition profits.

Required

1. Prepare the acquisition analysis at 1 January 2022.

2. Prepare the business combination valuation entries and pre-acquisition entries at 1
January 2022.
3. Prepare the business combination valuation entries and pre-acquisition entries at
31 December 2025.
4. Prepare the consolidation worksheet journal entries to eliminate the effects of
intragroup transactions at 31 December 2025.
(LO3, LO4, LO5, LO6 and LO7)

Answer:

1. At 1 January 2022:

Net fair value of identifiable assets

and liabilities of Gerringong Ltd = ($200 000 + $50 000 + $20 000) (equity)
= $270 000
Consideration transferred = $300 000
Goodwill = $30 000

2. Business combination valuation entry 1 January 2022

Goodwill Dr 30 000
Business combination valuation reserve Cr 30 000

Pre-acquisition entry at 1 January 2022

Retained earnings (1/1/22) Dr 50 000

Share capital Dr 200 000
General reserve Dr 20 000
Business combination valuation reserve Dr 30 000
Shares in Gerringong Ltd Cr 300 000

3. Business combination valuation entry 31 December 2025

Goodwill Dr 30 000
Business combination valuation reserve Cr 30 000

Pre-acquisition entry at 31 December 2025

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 Retained earnings (1/1/25) Dr 50 000
Share capital Dr 200 000
General reserve Dr 20 000
Business combination valuation reserve Dr 30 000
Shares in Gerringong Ltd Cr 300 000

Transfer from general reserve Dr 15 000

General reserve Cr 15 000

4. Adjustments for intragroup transactions at 31 December 2025

(a) Retained earnings (1/1/25) Dr 700

Income tax expense Dr 300
Cost of sales Cr 1 000
Sales Dr 5 500
Cost of sales Cr 5 100
Inventories Cr 400

Deferred tax asset Dr 120

Income tax expense Cr 120

The first adjusting entry deals with the unrealised profits in opening (beginning)
inventories. It is assumed that the unrealised profits in closing inventories from the period
ended 31 December 2024 and recognised as unrealised profits in opening inventories in this
period (i.e. $2000 - $1400 for Kiama Ltd and $1200 - $800 for Gerringong Ltd) become
realised by the end of the current period. As such, these profits need to be transferred from
the previous period to the current period by:
 Debiting “Retained earnings (1/1/25)” with an amount equal to the after-tax unrealised
profits in opening inventories (i.e. $1000 x (1 – 30%)) – this eliminates the unrealised
profits from the prior period’s profit.
 Crediting “Cost of sales” with an amount equal to the before-tax unrealised profits in
opening inventories – this increases the current profit as the previously unrealised profit is
now realised.

As a result of this transfer of profits to the current period, the current period’s profit increases
and a tax effect should also be recognised in the adjusting entry by:
 Debiting “Income tax expense” with an amount equal to the tax on the unrealised profits
in opening inventories.

The second adjusting entry eliminates the unrealised profits in closing (ending) inventories
of Kiama Ltd and Gerringong Ltd at 31 December 2025. As inventories that were originally
transferred intragroup are still on hand with both entities at 31 December 2025, the profits
related to those inventories items are unrealised and should be eliminated on consolidation
by:
 Debiting “Sales” with an amount equal to the intragroup price for current period sales
from both Kiama Ltd to Gerringong Ltd (i.e. $3000) and from Gerringong Ltd to Kiama
Ltd (i.e. $2500) – this eliminates the amount of revenue recognised by the entities on the
intragroup sales so that the consolidated figure reflects only the sales revenues generated
from transactions with external parties.

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 Crediting “Inventories” with an amount equal to the unrealised profits in ending
inventories ($500 - $300 for Kiama Ltd and $900 - $700 for Gerringong Ltd) – this
corrects the overstatement of inventories still on hand that are recorded by the entities
based on the intragroup price, making sure that those inventories are recorded at the
original cost to the group.
 Crediting “Cost of sales” with an amount equal to the difference between the debit
amount to “Sales” and the credit amount to “Inventories” – this eliminates the cost of
sales recognised by the entities on the intragroup sales (based on the original cost) and
adjusts the cost of sales recognised by the entities on external sales (based on the
intragroup price) so that the consolidated figure reflects only the cost of sales of the
inventories sold to the external parties based on their original cost to the group.

The second adjusting entry recognises the tax effect of the elimination of the unrealised
profits in closing inventories at 31 December 2025 by raising a deferred tax asset for the tax
recognised by Kiama Ltd and Gerringong Ltd, in advance on the unrealised intragroup
profits.

It is worth noting that the entire profits on the current period’s intragroup sales do not matter
for the adjusting entries; it is only the unrealised profits in closing inventories that are
considered as they are the ones that need to be eliminated.

(b) Sales Dr 6 000

Cost of sales Cr 4 000
Plant & machinery Cr 2 000

Deferred tax asset Dr 600

Income tax expense Cr 600

Accumulated depreciation – plant

& machinery Dr 100
Depreciation expense Cr 100
(10% x 1/2 x $2000)

Income tax expense Dr 30

Deferred tax asset Cr 30

The first adjusting entry decreases the machine’s value down from the price paid intragroup
to the original carrying amount of the machine at the moment of intragroup sale and
eliminates the sales revenue and the cost of sales recognised on the intragroup sale,
considering that the machine was recognised by the initial owner as inventories; the second
entry recognises the tax effect of the first entry by raising a deferred tax asset for the tax paid
by the intragroup seller on the profit that is unrealised from the group’s perspective (i.e. the
entire profit on the intragroup sale).

The third adjusting entry decreases the depreciation expense recognised for the machine
down from the depreciation recorded by the user of the vehicle (based on the intragroup price
paid) to the depreciation that should be recorded by the group (based on the carrying amount
of the machine at the moment of the intragroup sale). The annual depreciation adjustment is
equal to the intragroup profit multiplied by the depreciation rate per year. As the asset was
transferred intragroup on 1 July 2025, six months before the end of the current period, the

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depreciation adjustment is only half of the annual depreciation adjustment, i.e. ($6000 -
$4000) x 10% x ½. This depreciation adjustment decreases the expenses for the current
period and therefore increases the current profit by a part of the profit on the intragroup sale.
As such, it is said that a part of the intragroup profit has been realised. The fourth entry
recognises the tax effect of the third entry by decreasing the deferred tax asset recognised in
the second entry by the tax on the profit realised through the depreciation adjustment.

It should be noted here that although the original classification of the asset before the
intragroup sale was inventories, there won’t be any reclassification needed on consolidation
as, from the group’s perspective, the asset is going to be used as a machine from the moment
of the intragroup sale.

(c) Accounts payable Dr 1 000

Accounts receivable Cr 1 000

As Gerringong Ltd owes Kiama Ltd for items purchased during the period, in the individual
accounts a liability “Accounts payable” is recognised by Gerringong Ltd and an asset
“Accounts receivable” is recognised by Kiama Ltd. As those accounts reflect obligations and
resources receivable from within the group, they are eliminated on consolidation in this
adjusting entry.

(d) Revenue - services fees Dr 8 000

Advertising expenses Cr 8 000

This adjusting entry eliminates the services fee revenue recognised by Gerringong Ltd and
the advertising expense recognised by Kiama Ltd as a result of the advertising campaigned
that ran intragroup during the current period. As this adjusting entry does not have any net
impact on the profit:
 there won’t be any tax-effect adjusting entry.
 there won’t be any further adjusting entries in the next period for the fees incurred this
current period.

As the services fees were paid during the current period, there won’t be a need to eliminate
any another accounts during the current period as there is no services fees payable or services
fees receivable. Also, there were no services fees paid in advance for the next period and
therefore there are no prepaid services fees and services fees received in advance to
eliminate.

(e) Dividend revenue Dr 63 000

Dividend paid Cr 63 000

This adjusting entry eliminates the dividend revenue recognised by Kiama Ltd and the
dividend paid recognised by Gerringong Ltd during the current period. As this adjusting entry
does not have any net impact of the consolidated retained earnings, there won’t be any further
adjusting entries in the next period for the dividends paid this current period. Also, for
dividends there are no tax effects that should be recognised or adjusted on consolidation.

As the dividends were paid during the current period, there won’t be a need to eliminate any
dividends payable or dividends receivable.

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