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Hi there Sir,
I need help from u as I am a little confuse here.
Q1 June 2014
(iv) After the acquisition Penketh sold goods to Sphere for $20 million. Sphere had one fifth of these goods still in inventory at 31 March 2014. In March 2014 Penketh sold goods to Ventor for $15 million, all of which were still in inventory at 31 March 2014. All sales to Sphere and Ventor had a mark-up on cost of 25%.
Answer :
Revenue (620,000 + (310,000 x 6/12) – 20,000 intra-group sales) 755 000
COS
Penketh 400,000
Sphere (150,000 x 6/12) 75 000
Intra-group purchases (20 000)My question is, since there is still 1/5 unsold goods at the year end, why does the intra group sales and cos both 20k instead of sales 20k, cos 16k i.e. 20k/1.25?
I presume that there is a further adjustment to the cost of sales figure.
Does the answer not say “400,000 + 75,000 – 20,000 + 800”
Your post is conceptually incorrect anyway. One fifth of the intra group sales are still in inventory and therefore four fifths have been sold. The cost of sales figure adjustment is for 20,000 less the pup on the unsold goods.
That pup is calculated as 1/5 x $20,000 x 25/125 = 800
I teach my students first of all to eliminate the revenue / cost of sales figures $ for $
And then to make the cost of sales adjustment of 800 (as above)
In addition, think of your double entry! You are suggesting:
Dr Revenue 20,000
Cr Cost of Sales 16,000So where’s the missing 4,000?
Its my mistake! Not 16 000 but 19 200 i.e. Sales 20 000, Cos 19200, Profit 800, now I know where I’ve done wrong. Thank u so much Sir!
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