Example 2 Jessica Ltd sold inventories during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd, an external entity, for $8000. The income tax rate is 30%. Jessica Ltd - 100% --- Amelie Ltd 1. External sold 2. Jessica sells to 3. Amelie sells 1% items to Jessica for $12000 Amelie for $15000 external for $8000 Sales 15000 COGS 13500 Inventory 1500 Deferred tax asset 450 Income tax expense 4500 Half of the goods have been sold so the profit on the sale are now only (3000* %% ) = $1500 overstated. Tax expense reduced is now $1500 * 30% Income P S A G statement Sales 15000 8000 15000 8000 COGS 12000 7500 13500 6000 (COGS/2) COGS must be 50% of the original cost to the parent 12000*50%) Balance sheet 7500 15000 6000 Inventory (Inv of 12000/2) INCLASS EXAMPLE 2 - CHECK EXTRACT OF JOURNALS Jessica Amelie Adjustment Group Dr Cr Dr Cr Dr Cr Dr Cr Sales 15000 8000* 15000 8000 COGS 12000 7500 13500 6000 (15 X X ) (12 X X ) Inventory 12000 12 7500 1500 6000 (15 X X) (12 X X ) Deferred tax asset Income tax 450 900 450 150 450 Transactions with external entities