Accounting for intragroup transactions

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
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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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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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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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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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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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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

DrCost of goods soldx
CrInventoryx
▪ Consideration of tax paid on intragroup sale of inventory
DrDeferred tax assetx
CrIncome tax expensex

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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

DrSales200 000
CrCost of goods sold200 000
▪ Elimination of unrealised profit in closing inventory
Cost of goods sold40 000
CrInventory40 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

DrOpening retained earningsx
CrCost of goods soldx
Higher profits lead to higher tax expense
DrIncome tax expensex
CrOpening retained earningsx

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Applied Business Statistics for Managers
Unrealised profit in opening inventory-continued
▪ Eliminating unrealised profit in opening inventory

DrOpening retained earnings—1 July 202340 000
CrCost of goods sold40 000

Consideration of the tax on the sale of inventory held within
the group at the beginning of the reporting period

DrIncome tax expense13 200
CrRetained earnings—1 July 202313 200

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Applied Business Statistics for Managers
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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Applied Business Statistics for Managers
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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Applied Business Statistics for Managers
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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Applied Business Statistics for Managers
Example 26.5—Intragroup sale of a non-current asset-continued
Reversing gain and reinstating accumulated depreciation

DrGain on sale of Plant180 000
DrPlant220 000
CrAccumulated depreciation400 000

Recognising deferred tax asset

DrDeferred tax asset54 000
CrIncome tax expense54 000

Adjusting depreciation to reflect correct amount

DrAccumulated depreciation30 000
CrDepreciation expense30 000

Partially reversing deferred tax asset to reflect depreciation adjustment

DrIncome tax expense9 000
CrDeferred tax asset9 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 IncomeDr30000
Interest ExpenseCr30000

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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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Applied Business Statistics for Managers
Comprehensive example-continued
(iv)Gain on sale of equipment Dr 360000
Equipment Dr 90000
Accumulated depreciation, Equipment, Cr 450000

Deferred Tax assetsDr108000
Income tax expenseCr108000

[360000*.30 = 108000]

Accumulated DepreciationDr72000
Depreciation ExpenseCr72000

[810000/5-450000/5 =162000-90000=72000]

Income tax expenseDr21600
Deferred Tax assetsCr21600

[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

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