Question
PHASE 2 The auditors questioned why there were no consolidation adjustments for intra-group transactions. Tom Ato suggested that all such transactions between group companies are
PHASE 2 The auditors questioned why there were no consolidation adjustments for intra-group transactions.
Tom Ato suggested that all such transactions between group companies are at normal market prices and therefore he thought that no adjustments were necessary. However, the auditors have pointed out that this overstates profits and affected accounts, including consolidated sales (and therefore revenue growth). Normal profit on merchandise sales was 50% for Pumpkin and 45% for Squash.
Tom wants to visualise the impact of these adjustments on the consolidated financial statements.
He has therefore asked you to provide him with a spreadsheet showing the consolidation adjustments (in journal form) for the following intra-group transactions during 2018:
1. Pumpkin sold Squash merchandise at a price of $210,000
2. Squash sold Pumpkin merchandise at a price of $110,000
3. $21,000 remained owing by Pumpkin at 31 December 2018 for the merchandise sold to it by Squash.
4. Pumpkins inventories of merchandise (bought from Squash) were: a. $41,000 at the beginning of 2018, and b. $21,000 at the end of 2018.
5. Squashs beginning and closing inventories (of merchandise bought from Pumpkin) for 2018 were: a. Beginning: $31,000, and b. Closing: $11,000.
6. The other investment on Pumpkins balance sheet is actually a 10-year loan to Squash.
7. The terms of the 10-year loan to Squash require 5% annual interest payments. The loan was made on 1 January 2018 and interest was paid on 31 December 2018.
Phase 2 Required: Prepare the consolidation journal entries only for the above intragroup transactions for the year ended 31 December 2018.
Please use the Phase 2 tab on the Excel template provided and adhere strictly to the following instructions:
a) You will need to choose the most appropriate accounts to which to post each journal adjustment.
b) Post a separate numbered journal entry for each numbered piece of information above i.e., your journal entries should be posted to the corresponding columns for the above numbers
1 7. For example you will need to post a separate journal entry (Dr and Cr)
for #3 and a separate journal entry (Dr and Cr)
for #4a. c) You are only required to prepare journal entries for Phase 2 i.e., Tom does not want you to adjust the Phase 1 figures until he has reviewed and authorised the journal entries. ASSIGNMENT INSTRUCTIONS 1. Complete the Excel template and submit after renaming it as follows: ID_110309Ass2A_first name_Surname.xlsx 2. Assume a tax rate of 30% wherever relevant.
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