On 1 July 2015, Summer Ltd acquired 80% of the share capital to gain control of Winter Ltd. The following intra-group transactions occurred during the year ending 30 June 2016.
1. Winter Ltd paid an interim dividend of $150,000 to its shareholders from current year’s profits.
2. Winter Ltd declared a final dividend of $220,000 to its shareholders from current year’s profits.
3. During the 2015 - 2016 period, Summer Ltd sold inventory to Winter Ltd for $350,000. This inventory had previously cost Summer Ltd $300,000. At 30 June 2016, 25% of that inventory remained on hand with Winter Ltd.
4. Winter Ltd paid Summer Ltd, a management fee for administrative services they provided of $25,000.
5. Winter Ltd has an intra-group loan with Summer Ltd (Summer Ltd provided loan) of $2,000,000. The loan charges 5% interest annually. The interest for the current year remains unpaid at 30 June 2016.
6. Winter Ltd performed consulting services for Summer Ltd for which Winter Ltd received revenue of $250,000. Half of this amount remains unpaid at year end.
a) Prepare the journal entries required to eliminate the intra-group transactions above.
b) Explain how the unrealised profit on intra-group transactions is dealt with on consolidation.