Lecture 7 : Accounting for intragroup transactions
HI5020 Corporate Accounting
Holmes Institute
Applied Business Statistics for Managers
Topics covered in this session:
Understand the nature of intragroup transactions Understand how and why to eliminate intragroup dividends on
consolidation Understand how to account for intragroup sales of inventory
inclusive of the related tax expense effects Understand how to account for intragroup sales of non-current
assets inclusive of the related tax expense effects
Holmes Institute
Applied Business Statistics for Managers
Introduction to accounting for consolidation issues It is common for separate legal entities within an economic
entity to transact with each other In preparing consolidated financial statements:
intragroup balances, transactions, income and expenses
shall be eliminated in full
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Applied Business Statistics for Managers
Examples of intragroup transactions Payment of dividends to group members Payment of management fees to a group member Intragroup sales of inventory Intragroup sales of non-current assets Intragroup loans
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Applied Business Statistics for Managers
Consolidation adjustments for intragroup
transactions Typically eliminate these transactions by reversing the
original accounting entries made to recognise the
transactions in the separate legal entities
Note Consolidation journal entries are not written in the journals of
either company but are entered in a separate consolidation
journal
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Applied Business Statistics for Managers
Dividend payments from post-acquisition
earnings
Dividend payments In the consolidation process it is necessary to eliminate:
➢ all dividends paid/payable to other entities within the group
➢ all dividends received/receivable from other entities within the group Only dividends paid externally should be shown in the consolidated financial
statements
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Applied Business Statistics for Managers
Dividend payments-Journal Entries
To eliminate dividends payable:
Dr Dividends payable (statement of financial position)
Cr Dividends declared (statement of changes in equity)
To eliminate dividends receivable
Dr Dividend income (statement of P&L and OCI)
Cr Dividend receivable (statement of financial position)
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Intragroup sale of inventory From the group’s perspective, revenue should not be recognised
until inventory is sold to parties outside the group We will need to eliminate any unrealised profits from the
consolidated financial statements Unrealised profits result from inventory, which is sold within the
group for a profit, remaining on hand within the group at the end
of the period
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Applied Business Statistics for Managers
Example of intragroup sale of inventory
Let us assume that Company A controls Company B and: Company A sells $200 000 of inventory to Company B (see
diagram next slide) Company B in turn sells the inventory to an external
organisation, Company C, for $350 000
What total amount of sales should be recorded in the
consolidated financial statements?
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Applied Business Statistics for Managers
Intragroup sale of inventory-tax implications Each member of a group is typically taxed individually on its
income, not the group collectively If tax has been paid by one member of the group, from the
group’s perspective this represents a prepayment of tax
(deferred tax asset) to the extent that the inventory remains
within the group-due to unrealised profit This income will not be earned by the economic entity until
the inventory is sold outside the group
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Applied Business Statistics for Managers
Intragroup sale of inventory-journals Journal entry to eliminate inter-company sales
| Dr Cr |
Sales Cost of goods sold |
x x |
AssignmentTutorOnline
Journal entry to eliminate unrealised profit in closing stock
| Dr | Cost of goods sold | x |
| Cr | Inventory | x |
| Consideration of tax paid on intragroup sale of inventory |
||
| Dr | Deferred tax asset | x |
| Cr | Income tax expense | x |
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Applied Business Statistics for Managers
Example 26.3—Unrealised profit in closing inventory Big Ltd owns 100 per cent of the shares of Little Ltd These shares are acquired on 1 July 2022 During the 2023 financial year, Little Ltd sells inventory to Big
Ltd at a sales price of $200 000. The inventory cost Little Ltd
$120 000 to produce At 30 June 2023, half of the stock is still on hand with Big Ltd.
The tax rate is assumed to be 33 per cent
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Applied Business Statistics for Managers
Example 26.3—Unrealised profit in closing inventory Elimination of intragroup sales
| Dr | Sales | 200 000 |
| Cr | Cost of goods sold | 200 000 |
| Elimination of unrealised profit in closing inventory |
||
| Cost of goods sold | 40 000 | |
| Cr | Inventory | 40 000 |
Consideration of the tax paid on the sale of inventory that is still held
within the group
Dr Deferred tax asset 13 200
Cr Income tax expense 13 200
($40 000 × 33%)
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Unrealised profit in opening inventory
Reducing opening inventory reduces cost of goods sold
| Dr | Opening retained earnings | x |
| Cr | Cost of goods sold | x |
| Higher profits lead to higher tax expense | ||
| Dr | Income tax expense | x |
| Cr | Opening retained earnings | x |
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Unrealised profit in opening inventory-continued Eliminating unrealised profit in opening inventory
| Dr | Opening retained earnings—1 July 2023 | 40 000 |
| Cr | Cost of goods sold | 40 000 |
Consideration of the tax on the sale of inventory held within
the group at the beginning of the reporting period
| Dr | Income tax expense | 13 200 |
| Cr | Retained earnings—1 July 2023 | 13 200 |
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Sale of non-current assets within the group Assets of the group need to be valued as if the intragroup
sale had not occurred Need to reinstate the non-current asset to the original cost or revalued amount
➢ Eliminate any unrealised profits on sale
➢ Adjust depreciation
➢ There may be tax on profit of sale, which will represent a temporary
difference in the consolidated financial statements
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Applied Business Statistics for Managers
Sale of non-current assets within the group-Journal Entry
Reversing gain and reinstating accumulated depreciation
| Dr Dr Cr |
Gain on sale Asset Accumulated depreciation |
x x x |
Recognising deferred tax asset
| Dr Cr |
Deferred tax asset Income tax expense |
x x |
Adjusting depreciation to reflect correct amount
| Dr Cr |
Accumulated depreciation Depreciation expense |
x x |
Partially reversing deferred tax asset to reflect depreciation adjustment
| Dr Cr |
Income tax expense Deferred tax asset |
x x |
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Applied Business Statistics for Managers
Example 26.5—Intragroup sale of a non-current asset On 1 July 2022 Eddie Ltd acquired a 100 per cent interest in
Sandy Ltd On 1 July 2022 Eddie Ltd sells an item of plant to Sandy Ltd
for $780 000 This plant cost Eddie Ltd $1 million, is four years old and has
accumulated depreciation of $400 000 at the date of the sale The remaining useful life of the plant is assessed as six years The tax rate is 30 per cent
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Applied Business Statistics for Managers
Example 26.5—Intragroup sale of a non-current asset-continued Workings: The result of the sale of the item of plant to Sandy Ltd is that
the gain of $180 000—the difference between the sales
proceeds of $780 000 and the carrying amount of $600 000—
will be shown in Eddie Ltd’s financial statements
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Example 26.5—Intragroup sale of a non-current asset-continued From Eddie Ltd’s individual perspective it would have made a
gain of $180 000 on the sale of the plant and this gain would
have been taxable. At a tax rate of 30 per cent, $54 000 would be payable in tax
by Eddie Ltd and $54 000 would similarly have been included
in the income tax expense account.
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Applied Business Statistics for Managers
Example 26.5—Intragroup sale of a non-current asset-continued Working Sandy Ltd would be depreciating the asset on the basis of the
cost it incurred to acquire the asset. Its depreciation charge
would be $780 000 ÷ 6 = $130 000 From the economic entity’s perspective, the asset had a
carrying value of $600 000, which was to be allocated over
the next six years, giving a depreciation charge of $600 000 ÷
6 = $100 000. An adjustment of $30 000 is therefore required.
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Example 26.5—Intragroup sale of a non-current asset-continued The increase in the tax expense from the perspective of the
economic entity is due to the reduction in the depreciation
expense This entry represents a partial reversal of the deferred tax
asset of $54 000 recognised in the earlier entry. After six
years the balance of the deferred tax asset relating to the
sale of the item of plant will be $nil
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Example 26.5—Intragroup sale of a non-current asset-continued
Reversing gain and reinstating accumulated depreciation
| Dr | Gain on sale of Plant | 180 000 |
| Dr | Plant | 220 000 |
| Cr | Accumulated depreciation | 400 000 |
Recognising deferred tax asset
| Dr | Deferred tax asset | 54 000 |
| Cr | Income tax expense | 54 000 |
Adjusting depreciation to reflect correct amount
| Dr | Accumulated depreciation | 30 000 |
| Cr | Depreciation expense | 30 000 |
Partially reversing deferred tax asset to reflect depreciation adjustment
| Dr | Income tax expense | 9 000 |
| Cr | Deferred tax asset | 9 000 |
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Applied Business Statistics for Managers
Comprehensive example Zealandia ltd is the parent company holding 90 percent interest in the Oceania ltd. For
each of the following independent cases, provide adjusting entries necessary to
eliminate the effect of intragroup transaction at 30 June 2020: During the period Oceania Ltd sold inventory to Zealandia Ltd at a price of $240000.
The cost of the inventory to Oceania ltd was $168000. Ninety percent (90%) of the
inventory has been sold by Zealandia Ltd to outside third parties by the end of the
period. During the period, Oceania borrowed $1500000 from Zealandia Ltd which is still
unpaid by the end of the period. During the period Oceania Ltd has paid $30000
interest to Zealandia Ltd for the borrowing. At the end of the year, Oceania Ltd declared and paid a dividend amounting to
$180000. Zealandia Ltd has declared and paid a dividend of $150000.
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Comprehensive example-continued One year ago, at 1 July 2019, Oceania Ltd sold equipment to Zealandia Ltd for a price
of $810000. At the time of the sale, the carrying value of the equipment in the Oceania
Ltd.’s account was $450000 and the accumulated depreciation was $450000.
Zealandia is depreciating the equipment over a further 5 years period. The expected
salvage value is zero. Assume a corporate tax rate of 30 percent. During the period Zealandia has paid a consultancy fee to Oceania Ltd of $75000.
Zealandia has provided a management service to Oceania Ltd for $80000 which has
not been paid as yet by Oceania Ltd.
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Comprehensive example-continued
(i) Sales Dr $240000
Cost of goods sold Cr 240000
Cost of goods sold Dr 7200
Inventory Cr 7200
Deferred Tax Assets Dr 2160
Income tax expense Cr 2160
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Comprehensive example-continued
(ii) Loan payable Dr 1500000
Loan Receivable Cr 1500000
| Interest Income | Dr | 30000 |
| Interest Expense | Cr | 30000 |
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Comprehensive example-continued
(iii) Dividend income Dr 162000 (180000*90%)
Dividend Paid Cr 162000
(No entry is needed for dividend declared and paid by the
parent company because it is not an intra-group transaction.)
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Comprehensive example-continued
(iv)Gain on sale of equipment Dr 360000
Equipment Dr 90000
Accumulated depreciation, Equipment, Cr 450000
| Deferred Tax assets | Dr | 108000 |
| Income tax expense | Cr | 108000 |
[360000*.30 = 108000]
| Accumulated Depreciation | Dr | 72000 |
| Depreciation Expense | Cr | 72000 |
[810000/5-450000/5 =162000-90000=72000]
| Income tax expense | Dr | 21600 |
| Deferred Tax assets | Cr | 21600 |
[72000*.3=21600 OR 108000/5 = 21600]
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Comprehensive example-continued
(v) Consultancy fees revenue dr. $75000
Consultancy fees expense cr $75000
| Management fee revenue dr Management fee expenses cr |
$80000 $80000 |
Management fee payable dr $80000
Management fee receivable cr $80000
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Applied Business Statistics for Managers
Summary-what we have discussed The lecture considered how to eliminate intragroup transactions
during the consolidation process The following categories of intra-group transactions were
considered:
➢ Intra-group dividend payments,
➢ Intra-group sales of inventory,
➢ Intra-group borrowing
➢ Intra-group sales of non-current assets
➢ Intra-group service revenue & expenses
