Reference no: EM133011622

Question - Schooner Ltd is a 100% owned subsidiary of Sails Ltd. The rate of company income tax is 30%. During the year ended 30 June 2020 the accounts revealed:

-Schooner Ltd paid management fees of $25,000 to Sails Ltd.

-Sails Ltd sold inventory for $18,000 to parties external to the group. Schooner Ltd had previously sold this inventory to Sails Ltd for $14,000. The inventory had cost Schooner Ltd $10,000.

-Sails Ltd sold inventory to Schooner Ltd for $40,000. This inventory had cost Sails Ltd $20,000. Schooner Ltd sold three-quarters of this inventory to parties external to the group.

-On 1 July 2019, Schooner Ltd sold machinery to Sails Ltd for $200,000. The machinery was originally purchased by Schooner Ltd on 1 July 2014. The carrying amount of the machinery at the time of sale was $150,000 (cost $400,000, accumulated depreciation $250,000). The machinery is assessed as having a remaining useful life of 5 years from the date of sale. Straight-line depreciation is used.

Explain why the adjustments for ii) and iv) are required.