Explain,with Examples and the Assumptions Made,why It Is Necessary to Pass

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The Answer is From Worked Example 28.3,on pages 930-935,there were unrealised profits in the closing inventory of Big Ltd at 30 June 2015,so that when it is time to do the consolidation adjustments at the end of the next financial year for Big Ltd and its controlled entity there will be unrealised profits in opening inventory.Remember that the consolidation journal entries do not affect the accounts of the individual legal entities and hence do not carry forward,and therefore the cost of the opening inventory held by one of the entities within the group will be overstated from the group's perspective,as at the beginning of the financial period.
The closing retained earnings of Little Ltd in the last year (opening retained earnings this year)will also be overstated from the group's perspective as it will include a gain on the intragroup sale of inventory.In the consolidation adjustments,we need to shift the income from the previous period,in which the inventory was still on hand,to the period in which the inventory will ultimately be sold to parties external to the economic entity.The inventory is assumed to be sold in the following period.Hence the consolidation adjustment entries at the end of the following year at 30 June 2016,would be:
Dr Opening retained earnings-1 July 2015 $40 000
Cr Cost of goods sold $40 000
Remember that reducing the value of opening inventory will reduce cost of goods sold.This entry will effectively shift the income from 2015 to 2016 (the period in which the sale to an external party actually occurs).With higher profits this will lead to a higher tax expense,which,as we know,is based upon accounting profits with the adoption of tax-effect accounting.
Dr Income tax expense $13 200
Cr Opening retained earnings-1 July 2015 $13 200
Any profits in closing inventory in 2016 will also need to be accounted for.
For more information refer to 'Unrealised profit in opening inventory' .

Explain,with Examples and the Assumptions Made,why It Is Necessary to Pass

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