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Hello,
I am very confused about everything concerning PURP.
PURP is added back to cost of sales in profit and loss account.
When it comes to statement of financial position calculations, where is the PURP deducted from:
A) When the seller is the parent
B) when the seller is the susidiary
which calculations exactly like the retained earning calculations and what else?
Also how do we deal with PURP when it comes to associate company.
When using PURP when do we calculate and minus the parent companys percentage amd when do we take the whole amount?
Everything about PURP is such a haze.
Tutor, your help will be kindly appreciated.
Thank you.Purp is Provision for Unrealized Profit.
Firstly don’t confuse this with Intra-group balances (receivable and payables) those are need to be eliminated completely.PURP is the amount of profit (never the full amount of sale) that was sold between parent and subsidiary (or parent and associate) which is still within the group at the date of reporting. (it may be full or partial).
so first calculate the profit. (using info in the question and be careful with the words “margin and “markup” as they will have different method to calculate profit).
next check how much is still within the group (i,e % or fraction)
multiply the profit with amount still within the group and thats the amount called purp.
double entries (SFP)
IF Sub to Parent
Dr Retained earnings of SUBSIDIARY at date of reporting.( which is Minus btw)
Cr Group InventoryIf Parent to Sub
Dr Retained earning of PARENT (as now parent still have the profit)
Cr Group Inventory.example: During the year ended 31 March 2008 Sub sold goods to Parent
for $5.4 million. Sub had marked up these goods by 50% on cost.
Pauline had a third of the goods still in its inventory at 31 March
2008.ans:
1. calculate profit:
sales are $5.4 million on which Sub made a profit of:
$5,400,000 × 50/150 = $1,800,0002. how much still in group:
a third, so $1,800,000 × 1/3 = $600,000Sub is the seller so the profit must be removed from Sub’s
retained earnings
double entry:
Dr Retained earnings of Sub at Reporting date $600,000
Cr Group Inventories $600,000For Associates double entries: ( you may find it a bit confusing at F3 Level)
Parent to Associate:
DR Parent’s Retained Earnings.
CR Investment in Associate.Associate to Parent
DR Retained Earnings of Parent again ( this is because associates profit is already included in parents retained earnings. so we do it directly. )
CR Group Inventories ( as goods still in parent’s inventories)
Could you clarify regarding treatment in profit or loss statement, as I believe has to be adjusted here too.
Say sold £100 with cost of £90.
Cost of sales Cr £90 and revenue dr £100 (instead of adjusting retained earnings for profit element), and group inventory dr £10. Is this right?
I’m doing SBR by the way, not sure if I’m in the correct forum.
You are not in the correct forum – this forum is for Paper FA (which was Paper F3) 🙂
Best is to ask in the SBR Ask the Tutor Forum:
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