Aldinga Ltd owns all the issued shares of Beach Ltd, having acquired its ownership interest on 1 August 2013. The accountant, Ms McKay, is preparing the consolidated financial statements at 30 June 2019, and, as a part of preparing the consolidation worksheet for Aldinga Ltd, is analysing the intragroup transactions between the parent and its subsidiary. Assume a tax rate of 30%.

On 1 January 2018, Aldinga Ltd sold an item of machinery to Beach Ltd that Beach Ltd classified as inventory. At the date of sale, Aldinga Ltd had recorded the asset at a carrying amount of $150 000 (net of $20 000 depreciation, calculated using a 10% p.a. straight-line method). Beach Ltd recorded the asset at $160 000. Beach Ltd sold it to Oz Animals Ltd on 15 August 2019 for $100 000.

Required:

Ms McKay is concerned that the auditors may require her to explain the adjustments she has made. Provide suitable explanations for the transaction on 1 January 2018 above.