Corporate Accounting (ACCT2002) Assignment 2: Intra-group Transactions

This assignment provides a detailed analysis of intra-group transactions, crucial for accurate financial reporting in corporate accounting. It addresses five key issues: the importance of recording these transactions for dispute resolution and accurate profit identification, the accounting treatment of inventory sales between parent and subsidiary companies, the realization of profit when goods are not immediately sold to outsiders, the impact of asset costs and depreciation in intragroup transactions, and the adjustments needed for dividends paid by subsidiaries. The document references relevant accounting standards and explains how each issue affects the preparation of consolidated financial statements, ensuring a comprehensive understanding of the topic. This assignment is a solution for ACCT2002 course at Laureate university and provides a clear understanding of the topics.

Issue 1
Intragroup transactions are the transactions which are entered into between
two companies of the same group simultaneously. They are a part of the
transactions only because they are eliminated at the time of consolidation.
They are useful in tracking the differences which occur at the time of
arbitration and in settling the disputes happening between the companies.
Without recording them, tracing the intra-company transactions and
identifying the correct profits of an entity becomes a lengthier process. In
order to maintain the accuracy in the books of accounts and to quickly settle
any discrepancies, it is necessary to record the intragroup transactions.

Issue 2
• The intragroup transactions are mainly recorded to understand the
total amount of profits which are entered into by the entity. In case of
sale of inventory, the sales made to the other company may be
further sold by the company to outside parties. Hence, the profits
may further increase in case of such inventories. To gain an
understanding of these total profits, the inventory first sold by the
company is recorded as a sale and there is a reduction in the total
inventories of the parent company. Any further profits are calculated
on the amount at which the subsidiary purchases the goods.

Issue 3
• The goods sold by a parent company to a subsidiary company are
always not sold by a subsidiary to the outsiders. Sometimes, these
may also be lying with the subsidiary. In these circumstances, it can be
said that the profit has not been realized by the parent company.
However, there is a reduction in the inventory levels of the parent
company. To reflect the fact that the profit has not yet been realized,
parent companies tend to reduce the cost of goods sold from the
inventory and not the price at which they are sold.

Issue 4
• The cost of an asset acquired by a group is different from that of the
cost recorded by an acquirer within an intragroup transaction. The
amount hence recorded by both the acquirer and the group differs
due to the differences in the depreciation charged by the entities.
Hence, if there is a profit earned by the group on the sale of the asset,
then the overall cost of the group is lower than the cost of the
acquirer. To avoid the overstatement of these profits, depreciation is
charged by the entity on the sale of the non-current assets.

Issue 5
• In case of dividends paid by the subsidiary company, there would be a
reduction in the investment of the parent company in the subsidiary
company. Hence, there would an adjustment done in relation to the
same. Similarly, if the dividends are paid after the date of acquisition,
then the parent company would debit the cash account and reduce
the dividends receivable by it. This would result in the preparation of
more accurate financial statements by both the parent company and
the subsidiary company.

References
• Hadi, K. T. (2015). Consolidated financial statements.
• Biaek-Jaworska, A., & Matusiewicz, A. (2015). Determinants of the
level of information disclosure in financial statements prepared in
accordance with IFRS. Accounting and Management Information
Systems, 14(3), 453.