Alexis owns 100% of the shares of Ruby. During 2013, the following events occurred:

1. Alexis sold inventory for $10,000 that had been sold to it by Ruby in December 2012. The inventory originally cost

Ruby $6,000 and was sold to Alexis for $9,000.

2. Alexis recorded depreciation of $10,000 on machinery sold to it by Ruby on January 1, 2012. The machinery had a carrying amount in Ruby at the date of sale of $80,000. Both entities apply a depreciation rate of 10% p.a. on cost on a straight-line basis for this type of machinery.

Required

(a) For each of the above transactions, calculate the adjustments required in the consolidated financial statement at December 31, 2013, assuming an income tax rate of 40%.

(b) Explain the rationale behind each of the adjustments you have prepared.