Reference no: EM133048682
Question - Parent Ltd owns all the share capital of Subsidiary Ltd. On 30 June 2019, Parent Ltd sold an item of inventory to Subsidiary Ltd. The inventory had cost Parent Ltd $30,000 and was sold to Subsidiary Ltd for $100,000. The inventory is used by Subsidiary Ltd as Equipment which has a useful life of 7 years and is depreciated on a straight-line method. The tax rate is 30%
The journal entry recorded in the worksheet for the preparation of consolidated financial statements for the year ended 30 June 2020 was:
Dr Retained Earnings (Opening Balance) 49,000
Dr Accumulated Depreciation 10,000
Dr Income Tax Expense 3,000
Dr Deferred tax asset 18,000
Cr Depreciation Expense 10,000
Cr Equipment 70,000
Required - Explain the rationale for the above worksheet adjusting entry that was required for the preparation of the consolidated financial statements for the year ended 30 June 2020. Please make sure that you explain your rationale in your own words. Simply showing your calculation or stating the numbers used in your calculation will not attract any marks.