Question 4 (4 marks)

Jay Ltd sold inventories during the current period to its wholly owned subsidiary, Adios Ltd, for $15 000. These items previously cost Jay Ltd $12 000. Adios Ltd subsequently sold half the items to Night Ltd, an external entity, for $8000. The income tax rate is 30%.

The group accountant for Jay Ltd, Bonita Jeffrey, maintains that the appropriate consolidation adjustment entries are as follows.

Required

1. Discuss whether the entries suggested by Bonita Jeffrey are correct, explaining on a line-by-line basis the correct adjustment entries.

2. Determine the consolidation worksheet entries in the following period, assuming the inventories are on-sold to external parties, and explain the adjustments on a line-by-line basis.