Question

Ocean Ltd is a wholly-owned subsidiary of Breeze Ltd. The rate of company income tax is 30%. During the year ended 30 June 2017 the accounts revealed:

I.Ocean Ltd paid management fees of $15,000 to Breeze Ltd.

ii Breeze Ltd sold inventory for $17,500 to parties external to the group. Ocean Ltd had previously sold this inventory to Breeze Ltd for $15,000. The inventory had cost Ocean Ltd $10,000. iii Breeze Ltd sold inventory to Ocean Ltd for $40,000. This inventory had cost Breeze Ltd $20,000. Ocean Ltd sold three-quarters of this inventory to parties external to the group.

iv On 1 July 2016, Ocean Ltd sold machinery to Breeze Ltd for $150,000. The machinery was originally purchased by Ocean Ltd on 1 July 2012. The carrying amount of the machinery at the time of sale was $120,000 (cost $200,000, accumulated depreciation $80,000). The machinery is assessed as having a remaining useful life of 5 years from the date of sale. Straight-line depreciation is used.

Required A) Prepare the consolidation elimination journal entries required for the above intra-group transactions. Show workings and calculations.

Answer 1

i) Management Fees:

Breeze A/C Dr 15000

To Ocean A/C 15000

(Management fees paid to parent company)

Ocean A/C Dr 15000

To Bank A/C 15000

(Amount paid by subsidiary in Bank)

ii) Upstream sale

Sale A/C Dr 15000

To Cost of Goods Sold A/C 15000

iii) Downstream Sale

Sale A/C Dr 40000

To Cost of Goods Sold A/C 20000

To Inventory A/C 20000

iv)Sale of asset

In Ocean Ltd Books

Depreciation A/c Dr 80000

To Accumulated Depreciation A/c 80000

(Recording Depreciation on Machinery Sold)

Cash A/C Dr 150000

Accumulated Depreciation A/C Dr 80000

To Machinery A/C   200000

To Gain on Sale of Machinery A/C 30000

(Record Sale of Machinery)

In Breeze Ltd Books

Machinery A/C Dr 150000

To Cash A/c 150000

(Record of Purchase of Equipment)

Elimination Entries: Gain on sale of machinery

Gain on Sale 30000

Machinery 50000

To Accumulated Depreciation 80000