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Jessica Ltd sold inventory 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 for $8000. The tax rate is 30%.
The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows:
Sales Dr 15000Cost of Sales Cr 13000Inventory Cr 2000Deferred Tax Asset Dr 300Income Tax Expense Cr 300
Required:
A. Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entries.
B. Determine the consolidation worksheet entries in the following year, assuming the inventory is on-sold, and explain the adjustments on a line-by-line basis.
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