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Intragroup Transactions & BalancesOverview Review of consolidation Elimination of intragroup transactions and balances I/G investments and dividends I/G loans and interests I/G receivables and payables I/G sales of goods and services Elimination of I/G unrealised profits Revaluation

I/G investments and dividends- This can be broken down into two scenarios. The first being dividends from pre-acquisition earnings of S and the second being dividends from post-acquisition earnings of SThe general elimination entries (to avoid double-counting) areDr Dividend Income (of P, from S) xCr Dividend distribution (of S)   xDr Dividend payable (of S) xCr Dividend Receivable (of P) xDividends from post acquisition earnings of S- Method I would take would be to prepare journal entries that would have appeared in the separate accounts of Company A and Company B and then from those do the elimination entires. This will help with the worksheet. Don't forget to do consolidation entry to eliminate investment in Company B. page 923Dividends from Pre-acq earnings of S- The payment of a dividend by a subsidiary is treated as an indication that the parent's investment in a subsidiary may be impaired, ifi. the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee's net assets, including associated goodwillii. the dividend exceeds the total comprehensive income of the subsidiary, jointly controlled entity or associate in the period the dividend is declared. Investment in subsidiary in parents own accounts must be written down to its recoverable amount by recognising an impairment loss expenseDr Impairment loss- Investment in SubsidiaryCr Accumulated impairment loss- Investment in SubsidiaryHowever, upon consolidation, the impairment losses relating to the paren't investment in the subsidiary would be reinstated to both the Investment in Subsidiary account and to the subsidiary's equity by virture of the following entiresDr Accumulated Impairment loss- Investment in SubsidiaryCr Impairment loss-Investment in Subsidiary This acts to restore the investment in sub account back to original purchase price paid by parent and adjusts equity of sub to include entire equity of sub at acquisition

I/G Receivables and Payables- these may include loans, interest accrued on loans, trade and other debts, dividends receivable and payableTo avoid over-statement of group assets and liabilitiesDr Payables XCr Receivables xTo avoid overstatement of group income and expensesDr Interest income xCr Interest expense x

I/G Debenture Holding-Steps are to eliminate the debentures liability of the issuer against the debentures asset of the holder, eliminate the interest expense of the issuer against the interest income of the holder, eliminate the interest payable of the issuer against the interest receivable of the holder.You may need to do a debenture scheduleFrom the economic entity's viewpoint: no debentures have ever been issued to any outside partyDr Debentures (liability of X) 97000Cr Debentures (asset of Y) 97000One year laterDr Debentures (liability of X) 97834 (this is beginning liability)Cr Debentures (asset of Y) 97834Dr Interest income (of Y) 8834Cr Interest expense (of X) 8834( this is interest expense during year 1)In the last year you only have to do the entries for interest.

I/G Sales of Goods and ServicesTo avoid overstatement of group revenues and expenses eliminate I/G sales of goodsDr Sales Revenue xCr Cost of goods sold xand eliminate I/G provision of services e.g.Dr Management fee revenue xCr Management fee expenses xThis is broken down into 3 stagesStage 1- Where the group acquires inventory when one of the individual companies do. Assume it costs X Ltd $2.There is no elimination on consolidation.Stage 2- Within the group there is a sale of good. Assume sold for $5  The elimination entry isDr Sales Revenue 5Cr COGS                2Cr Inventory             3Unrealised profit in ending inventory**If goods/inventory remain within the group as end of period inventory: group's inventory carrying amount is inflated by the profit made by the seller in the group which is unrealised from group's viewpoint. Unrealised profit should be eliminated byDr Sales Revenue xCr COGS               xCr Inventory           x

If buyer has expensed the purchased items (i.e. goods have been resold to parties outside the group and becomes COGS (Stage 3): only eliminate sales and cost of goods sold, no profit elimination is necessary. Transfer price between X and Y merely allocates group profit among companies and does not inflate group profitFOR EXAMPLE: X Purchased goods for $200 and sold them to Y for $500 in the same group. At the end of the year, Y still holds these goods as inventory. From the group's viewpoint X's sales revenue ($500) and cost of goods sold ($200) are nothing and the inventory of Y has been inflated by unrealised profit ($300) which should be eliminated. The subsequent memorandum journal entries areDr Sales 500Cr Cost of Goods sold 200Cr Inventory 300As the carrying amount of inventory in CFS is $200 and its tax base is $500, there is a deductible temporary difference of $300 x 30% = 90Dr Deferred tax asset 90Cr Income tax expense 90ANOTHER EXAMPLE. In year 1, X purchased goods for $800 and sold them to Y for $1000 in the same group on credit. By the end of the year 1, Y has sold 75% of these goods to parties outside the group and still holds 25% as inventory. At the end of the Year 1, Y has paid $600 and still owes $400 for the goods 

The unrealised profit is equal to (1000-800) x 25%=50Dr Sales 1000Cr Cost of goods sold 950Cr Inventory                  50CA of remaining inventory is less than its TB by 50. Arises to deductible temporary difference of 50 and a deferred tax asset of 50 x 30%= 15Dr Deferred tax asset 15Cr Income tax expense 15Intragroup receivable and payableDr Accounts Payable (of Y) 400Cr Accounts Receivable (of X) 400

When there is unrealised profit in beginning inventory and the goods have since been sold in the current year, the previous year unrealised profit is eliminated by Dr SOP Retained earnings 50Cr Cost of goods sold 50The effect of the above memorandum journal entry is to transfer $50 profit from year 1 (at the time unrealised) to Year 2 (now realised)Tax effect: transfer $15 income tax expense from year 1 to year 2Dr Income tax expense 15Cr SOP Retained earnings 15

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