You have been employed as the graduate of Sky Ltd and have been asked advice on the following three technical issues, relating to accounting for intra-group transactions.

Issue 1: Our subsidiary company issued a loan to our Parent company on 1 April this year for $800,000. Interest is charged at 15% per annum. Interest payments have not been made by year end. Please explain the consolidation entries required to eliminate this intragroup transaction.

Issue 2: What do we need to do with the existing goodwill balance, currently sitting in the subsidiarys financial statements if we have a gain on bargain purchase on acquisition? I believe these are two different accounts and we should not adjust the subsidiarys goodwill. Include in your answer, the adjusting entry required in the consolidation worksheet.

Issue 3: I am confused as to why we would ever use Retained earnings in intragroup transactions. It doesnt make sense to use equity accounts, to eliminate the effect of unrealised profits. Please explain the reason and provide at least two examples of when this account would be used in consolidation elimination entries.

Required:

Using appropriate referencing and technical knowledge, discuss and provide clear and practical advice on the above three (3) issues. Ensure that you clearly explain which accounts and amounts need to be adjusted as consolidated worksheet entries and explain the reason why these amounts need to be increased or decreased from the Groups perspective.