During the Year Ended 30 June 2017, a Subsidiary Sold

question 28

Short Answer

During the year ended 30 June 2017, a subsidiary sold inventories to a parent for $90 000. The inventories had previously cost the subsidiary entity $72 000. By 30 June 2017 the parent had sold 75% of the inventories to a party outside the group. The remaining inventories were sold externally in July 2017. The company tax rate is 30%. Which of the following is the adjustment entry in the consolidation worksheet at 30 June 2018? $\begin{array}{lllr}\text { Sales revenue } & \mathrm{Dr} & 90000 & \\\text { Cost of sales } & \mathrm{Cr} & & 85500 \\\text { Inventories } & \mathrm{Cr} & & 4500 \\\text { Deferred tax asset } & \mathrm{Dr} & 1350 & \\\text { Income tax expense } & \mathrm{Cr} & & 1350\end{array}$

$\begin{array}{llll}\text { Retained earnings } & \mathrm{Dr} & 4200 \\\text { Income tax expense } & \mathrm{Dr} & 1800 \\\quad \text { Cost of sales } & \mathrm{Cr} & &6000 \\\text { Retained earnings } & & & \\\text { Income tax expense } & \mathrm{Dr} & 3150 \\\quad \text { Cost of sales } & \mathrm{Dr} & 1350 \\& \mathrm{Cr} & & 4500\end{array}$


$\begin{array}{llll}\text { Retained earnings } & \mathrm{Dr} & 4500 \\\quad \text { Inventories } & \mathrm{Cr} & & 4500 \\\text { Deferred tax asset } & \mathrm{Dr} & 1350 & \\\text { Retained earnings } & \mathrm{Cr} & & 1350\end{array}$

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Definitions:

Marginal Tax Rate

The rate at which an additional dollar of income would be taxed, giving insight into the impact of potential income increases on one's tax burden.

Cash Operating Costs

Expenditures directly related to the day-to-day business operations, excluding non-cash costs.

Depreciated

Refers to a reduction in the value of an asset over time, typically due to wear and tear or obsolescence.

Marginal Tax Rate

The tax rate that applies to the last dollar of the taxpayer's income or the next dollar of taxable income earned.