Hydra Ltd owns 100% of Red Ltd.

On 1 July 2017, Hydra Ltd sold an item of plant to Red Ltd for $200 000. At the time of sale, the plant had an original cost of $300 000, a carrying amount of $220 000 and a remaining useful life of 8 years. The tax rate is 30%.

(a) The trainee accountant, Lara, is asked to prepare all consolidation journals for the year ending 30 June 2021. Lara says no consolidation entry is necessary as the parent company sold to the subsidiary in the year ending 30 June 2018 and a consolidation entry would only be needed in the current year if the subsidiary had sold tothe parent. Provide a brief report to Lara, explaining why her reasoning is not correct.

(b) Prepare the correct consolidation/elimination entries for the year ending 30 June2021.

Note: journals must be presented in a professional manner and all workings shown.

(c) Why must a depreciation adjustment be made as part of the consolidation/elimination entries prepared in (b)?

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