Ocean Ltd is a wholly-owned subsidiary of Breeze Ltd. The rate of company income tax is 30%. During the year ended 30 June 2017 the accounts revealed: i Ocean Ltd paid management fees of $15,000 to Breeze Ltd. ii Breeze Ltd sold inventory for $17,500 to parties external to the group. Ocean Ltd had previously sold this inventory to Breeze Ltd for $15,000. The inventory had cost Ocean Ltd $10,000. iii Breeze Ltd sold inventory to Ocean Ltd for $40,000. This inventory had cost Breeze Ltd $20,000. Ocean Ltd sold three-quarters of this inventory to parties external to the group. iv On 1 July 2016, Ocean Ltd sold machinery to Breeze Ltd for $150,000. The machinery was originally purchased by Ocean Ltd on 1 July 2012. The carrying amount of the machinery at the time of sale was $120,000 (cost $200,000, accumulated depreciation $80,000). The machinery is assessed as having a remaining useful life of 5 years from the date of sale. Straight-line depreciation is used.

Required B) Explain why the adjustments for ii) and iv) are required (Explain in your own words).

Question 12 options: