Intragroup Transactions - Test Bank – 9e

View Product website:

https://selldocx.com/docx/intragroup-transactions-test-bank-9e-1084

Chapter 26 Testbank

1. When an item of property, plant and equipment is sold, the difference between the carrying amount of the asset and the sale proceeds is shown as a gain or loss on sale.

True   False

2. AASB 112 Income Taxes applies to temporary differences that arise from the elimination of profits and losses resulting from transactions by group entities with external parties.

True   False

3. When an item of property, plant and equipment is sold, the difference between the carrying amount of the asset and the sale proceeds is shown as a gain or loss on sale.

True   False

4. In the consolidation process, it is necessary to eliminate all dividends paid/payable to other entities within the group, but not the intragroup dividends received/receivable from other entities within the group.

True   False

5. Monster Co Ltd owns 100% of the issued shares of Mini Co Ltd.

Mini Co Ltd declared a dividend of $100 000 for the period ended 30 June 2024.

Monster Co Ltd accrues dividends when they are declared by its subsidiaries.

What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2025?

A.

B.

C.

D.

6. The treatment of dividends, paid by a subsidiary, that are identified as paid out of pre-acquisition profits in the period they are paid, is carried out to:

A. capitalise the dividend in the books of the parent entity as a further investment in the subsidiary. This amount will be eliminated on consolidation

B. record dividend revenue and the receipt of cash in the books of the parent entity

C. record a return of the investment in the subsidiary by decreasing the investment in the subsidiary in the books of the parent entity. The amount of the investment will be eliminated on consolidation

D. record a decrease in pre-acquisition reserves or retained profits in the books of the subsidiary

7. Radio Ltd acquired all the issued capital of Wave Ltd for cash consideration of $2.3 million (which includes payment for dividend entitlement). The fair value of the net assets of Wave Ltd at that date was $1.8 million as follows:

After acquisition, Wave Ltd declares a dividend of $300 000 that is identified as being paid out of pre-acquisition profits.

What consolidation journal entries would be required to prepare group accounts?

A.

B.

C.

D.

8. Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2025 for cash consideration of $1.5 million. The fair value of the net assets of Nail Ltd at that date was $1.2 million as follows:

During the period ended 30 June 2026, Nail Ltd declared a dividend of $200 000 that is identified as being paid out of post-acquisition profits.

Goodwill had been determined to have been impaired by $15 000 during the period.

What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2026?

A.

B.

C.

D.

9. Large Company owns 80 per cent of the issued capital of Smaller Company and Large Company owns 60 per cent of the issued capital of Medium Company.

The three companies form an economic entity for the purposes of consolidated accounts.

During the period Smaller Company sold inventory to Medium for $400 000.

Medium sold the same inventory to Large for $560 000 and Large sold it to an entity external to the group for $760 000.

What is the sales revenue reported in the consolidated statements for this item?

A. $1 416 000

B. $1 720 000

C. $760 000

D. $400 000

10. Companies A, B and C are all part of the one economic entity, but all these are separate legal entities and are required to prepare their own financial statements.

Company A sold Company B inventory that cost $56 000 for $78 000.

At the end of the same period Company B has three-quarters of that inventory still on hand and the rest has been sold to an entity outside the economic group.

At what amount should the inventory remaining in Company B be presented in Company B's own financial statements?

A. $42 000

B. $58 500

C. $56 000

D. $14 625

11. French Ltd owns 100 per cent of the issued capital of Pastry Ltd.

During the period ended 30 June 2024, Pastry Ltd sold inventory that cost $190 000 for $300 000 to French Ltd.

Sixty per cent of this inventory remains on hand in French Ltd at the end of that year.

Both companies use a perpetual inventory system and the taxation rate is 30 per cent.

What consolidation journal entries are required in relation to the inter-company transaction for the period ending 30 June 2025 in which all such unsold inventory has been sold to external parties?

A.

B.

C.

D.

12. Which of the following statements describes the reasons why tax adjustments may be required when eliminating the unrealised profit from intragroup sales of inventory?

A. Instead of two separate payments, one single amount is to be paid from the group's perspective.

B. Different tax rates are applicable for such transactions.

C. If tax has been paid by one of the separate legal entities, from the group's perspective this represents a deferral of the payment of tax.

D. If tax has been paid by one of the separate legal entities, from the group's perspective this represents a pre-payment of tax.

13. What is the amount of unrealised profit that needs to be eliminated at the end of the period, in the following situation, where Barker Limited is the subsidiary of Corbett Limited? (Ignore the tax effect.)

Barker purchases 500 units of inventory for $20 each.

Barker sells this entire inventory to Corbett at a mark-up of 50 per cent.

At the end of the period, 100 units are on hand.

A. $1000

B. $2000

C. $3000

D. $5000

14. Tookey Ltd sold inventory items (with a cost of $75 000) to its parent Milky Ltd for $135 000.

One third of the inventory items were sold by Milky Ltd to external parties before the financial year end.

Ignoring taxes, which of the following statements is correct with respect to this transaction only?

A. Consolidated sales will decrease by $75 000.

B. Consolidated sales will decrease by $95 000.

C. Consolidated profit will decrease by $60 000.

D. Consolidated profit will decrease by $40 000.

15. McKay Ltd is a parent entity of Shephard Ltd, a wholly owned subsidiary. Which of the following statements is true of the dividends reported in McKay Ltd's consolidated statement of financial position?

A. Only intra-group dividends received from Shephard Ltd would be reported.

B. Only those paid by McKay Ltd to external shareholders would be reported.

C. Dividends paid by both McKay Ltd and Shephard Ltd would be reported.

D. Dividends received from Shephard Ltd would be adjusted from the dividends paid by McKay Ltd and the balance amount would be reported.

16. Which of the following is true about inter-entity sales of inventory?

A. Companies in an economic entity may increase the level of consolidated sales reported by selling inventory between themselves.

B. Transactions of inventory between entities that form an economic group should be eliminated in proportion to the level of control between the parent entity and the subsidiary entity.

C. If we simply aggregate the sales of the parent and subsidiary companies, without adjustment, when there have been intragroup sales, total income would be overstated.

D. The value of inventory in an inter-entity sale should be re-measured to fair value and the adjustment to be recorded as consolidation income/loss.

17. Pitt Ltd sells inventories to Upper Ltd during the financial year ended 30 June 2027.

At 30 June 2027 50 per cent of this inventory remained unsold.

The inventories were held by Pitt Ltd at a value of $45 000 and were sold with an 80 per cent mark-up to Upper Ltd.

By 30 June 2028 all of this inventory is sold.

What is the consolidation adjustment for this inventory now when it is sold to external parties by Upper Ltd? Assume no tax.

A.

B.

C.

D.

18. Which of the following is correct about dividends paid by a subsidiary from pre-acquisition profits of the subsidiary?

A. These are accounted for as a return of part of the cost of the original investment.

B. These are not adjusted for and are shown on the parent entity's consolidated financial statements.

C. The dividends are recorded in the parent and subsidiary financial statements and only cash is adjusted.

D. These are recorded by debiting Dividend receivable and crediting Dividend income in the parent's accounts.

19. A transaction undertaken between separate legal entities within an economic entity is called an:

A. intragroup transaction.

B. intergroup transaction.

C. international transaction.

D. None of the given answers are correct.

20. The effects of all ______ must be eliminated in full as part of the process of preparing consolidated financial statements.

A. intragroup transactions

B. intergroup transactions

C. international transactions

D. None of the given answers are correct.

21. Which among the following is not included in intragroup transactions?

A. The payment of dividends to non-group members

B. Intragroup loans

C. Intragroup sales of inventory

D. The transfer of tax losses between entities with or without consideration

22. As per paragraph B86c of AASB 10 Consolidated Financial Statements, intragroup losses may indicate an impairment that requires _____________ in the consolidated financial statements.

A. recognition

B. no recognition

C. to be eliminated

D. None of the given answers are correct.

23. Which among the following standards provides guidelines for consolidated financial statements for intragroup transactions?

A. AASB 10

B. AASB 102

C. AASB 9

D. None of the given answers are correct.

24. From the individual legal entity perspective, if the selling organisation has made a profit on an intragroup sale, it will ____________ on this gain.

A. need to pay tax

B. not need to pay tax

C. claim refund of tax

D. None of the given answers are correct.

25. An entity within a group sells a non-current asset to another member of the group at a profit. The payment of tax by the individual legal entity in this case is considered from the group's perspective to represent a prepayment of tax in the form of a ___________________ .

A. deferred tax asset

B. deferred tax liability

C. current tax liability

D. None of the given answers are correct.

26. A group will be able to utilise a deferred tax asset arising from a group member's sale of a non-current asset to another group member at a profit, over the remaining useful life of the asset because the separate legal entity that acquired the non-current asset will be able to obtain a ______________________ .

A. lower tax deduction

B. marginal tax deduction

C. higher tax deduction

D. None of the given answers are correct.

27. _________ should be shown in the consolidated financial statements.

A. Only dividends paid externally

B. Only dividends paid internally

C. Both dividends paid externally and internally

D. None of the given answers are correct.

28. Even though the separate legal entities in the group might be paying dividends to each other, it does not make sense for such dividends to be shown when we consider the group as ____________ .

A. a single economic entity

B. multiple economic entities

C. two different economic entities

D. None of the given answers are correct.

29. Entities that are related often sell inventory to one another in what is known as an ______________________________.

A. intragroup sale of inventory.

B. intergroup sale of inventory

C. international sale of inventory

D. None of the given answers are correct.

30. When intragroup sale of inventory happens, from the group's perspective, revenues should not be recognised until inventory has been sold to _____________________ .

A. parties inside the group

B. fully-owned subsidiaries in the group

C. parties external to the group

D. the parent entity

31. Explain what an intragroup transaction is and provide examples.

______________________________________________________________________________

32. Discuss the accounting treatment of intragroup transactions as stipulated in paragraph B86c of AASB 10 Consolidated Financial Statements.

______________________________________________________________________________

33. Discuss why accountants are required to know what intragroup transactions represent.

______________________________________________________________________________

34. Discuss the accounting treatment of the sale of non-current assets within the group, while preparing consolidated financial statements.

______________________________________________________________________________

35. Why do accountants need to know when and how to eliminate intragroup transactions?

______________________________________________________________________________

36. If one organisation within a group sells a non-current asset to another member of the group at a profit, will this lead to a deferred tax asset on consolidation? Why or why not?

______________________________________________________________________________

37. Following consolidation, should dividends paid to the parent entity by its subsidiaries be shown in the economic entity's financial statements?

______________________________________________________________________________

38. Will temporary differences pertaining to tax expense arise as a result of intragroup sales of non-current assets?

______________________________________________________________________________

39. When an item of property, plant and equipment is sold, where will the difference between the carrying amount of the asset and the sale proceeds be shown?

______________________________________________________________________________

Chapter 26 Testbank