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Hi Mr. Moffat, I am having difficulty with a question from BPP.
Jessica Co acquired 75% of the share capital of Patpost Co on 1 January 20X7. The draft statements of profit or loss for the two companies for the year ended 31 December 20X7 are shown below.
Jessica Co Patpost Co
$m $m
Revenue 7,500 3,000
Cost of sales 4,000 1,600
Gross Profit 3,500 1,400
Operating expenses 2,000 500
Profit before tax 1,500 900
Tax 300 120
Profit for the year 1,200 780
During the year, Jessica Co sold goods costing $3m to Patpost Co for $5m. At the year end,50% of these goods remained in Patpost’s inventory.So unrealised profit is 1 million and after calculation we get profit for the year 1979 million. It’s clear till here. But then book calculates NCI like this
Profit attributable to:
Owners of the parent (bal fig) 1,484.5
Non-controlling interest ((25% X 1979) – 0.25) 494.5
1,979.0
Isn’t it wrong to use all profit for NCI?Is it the fact that we are using all the profit and not subtracting the unrealised profit that is worrying you?
If so, the it is Jessica that had recorded the profit on their sales to Patpost. Therefore it is Jessica’s profit that was including the unrealised profit, not Patpost’s and therefore Patpost’s profit does not need adjusting.
The free lectures on this will help you.
Thanks for the reply but the thing is that 1979 – is the profit for whole group. In lectures and also in the book, profit attributable to NCI is calculated using the profit for subsidiary which is 780 in this case. I think using consolidated profit -1979- gives Patpost more than it has earned.
Sorry – I was only thinking about the unrealised profit.
Assuming that you have copied the question correctly (I don’t have the book) then it does seem that they have made a mistake.
The NCI should simply be 25% of Patpost’s profit (without any adjustment for the unrealised profit).
I do not know because as I wrote in my reply I do not have the BPP Study Text and therefore I cannot check whether or not the question had been copied correctly.
I have certainly no idea whether or not they still have the same question in the current edition of the Study Text, whether or not it is worded as the original poster had typed, or whether the current answer is right or wrong.
Again, I do not have the book!!!
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