Intragroup Transactions - Inventory Sold As Inventroy Flashcards
List the pro form journal entry in step 1 - adjustment of consolidated retained earnings at beginning of the year to ensure that it is in agreement with consolidated retained earning at the end of previous year.
Dr Retained earnings - beginning of the year (S)(SCE)
Dr Deferred tax (SPF)
Cr Cost of sales (S)(P/L)
Explanation: the retained earning of previous year is adjusted with the unrealized profit from closing inventory, therefore the seller’s cost of sale needs to be reduce with the unrealized gain and this has tax consequences (reduces tax) therefore deferred tax asset is raise. The reminder amount is to adjust the earning of seller as it is overstated by the unrealized profit.
What is the step 2 of pro forma journal - realization of unrealized profit included in the opening inventory?
Dr Income tax expenses (S)(P/L)
Cr Deferred tax (SFP)
Explanation: it is assumed that the inventory bought from last year is sold in the current year, therefore the tax consequence needs to be record. Increased in tax expense and reduce deferred tax asset by raising deferred tax liability.
What is step 3 pro form journal entry for elimination of intra group sale of inventory?
Dr revenue (S)(P/L)
Cr Cost of sale (P)(P/L)
Explanation: the sale needs to be eliminated in full as per IFRS, therefore, revenue is decreased with full sales amount and the cost of sale of buyer is reduced with full amount. (Assumed it is sold)
What is step 4 of pro forma journal - elimination of unrealized gain included in the closing inventory of the buyer (parent)?
Dr Cost of sales (S)(P/L)
Cr Inventories (P)(SFP)
Explanation: the closing inventory of the buyer is overstated by the unrealized profit therefore needs to be reduced. The cost of sales of the seller is overstated as the good has not been sold to an outside third party.
What is step 5 of pro forma journal - tax implication of unrealized profit included in closing inventory?
Dr Deferred tax (SFP)
Cr Income tax expense (P)(P/L)
Explanation: as the profit is overstated, we need to reduce the income tax expense consequence to that and raised a deferred tax asset in contrast.
What is step 6 of the pro forma journal entry - main elimination journal at acquisition date?
Dr Share capital (S)(SCE)
Dr Retained earnings (S)(SCE)
Cr Investment in S Ltd (P)(SFP)
Cr Non controlling interest (SFP)
What is step 7 of the pro forma journal - recognition of NCI’s share of retained earning for the period since acquisition until beginning of current year?
Dr Retained earnings - beginning of year (S)(SCE)
Cr Non controlling interest (SFP)
Explanation: portion of the opening balance of retained earning belongs to NCI therefor it needs to be allocated.
What is the final pro forma journal entry of recognition of NCI’s interest in profit for the current year?
Dr NCI (P/L)
Cr NCI (SFP)
