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Is my logic and Journal entry correct? This is from the December 2013 Q1 exam paper.
Parent sells to Subsidiary at 4 million so I want to eliminate this :
Dr COS 4000
Cr Rev 4000For unrealised profit the subsidiary is selling back to the parent:
9000-4000(already reversed out)= 5000
5000 – 1400(incurred cost) = 3600
The inventory left in the subsidiary’s warehouse is 1/6 (3600/9000)
Unrealised profit 600
Dr COS 600
Cr Inventory 600Cheers
This entry
“Parent sells to Subsidiary at 4 million so I want to eliminate this :
Dr COS 4000
Cr Rev 4000”has made it worse – your debits and credits are the wrong way round!
Reading on, your entire answer is not even close.
Write out the full question about the intra-group activities and I’ll get back to you. Meanwhile, after you’ve typed out the question, go and empty your mind of any lingering pre-conceptions because they’re most likely wrong!
Ok Mike. Please see the question below.
“Polestar transferred raw materials at their cost of $4 million to Southstar in June 2013. Southstar processed all of these materials incurring additional direct costs of $1·4 million and sold them back to Polestar in August 2013 for $9 million. At 30 September 2013 Polestar had $1·5 million of these goods still in inventory. There were no
other intra-group sales.”Maybe i am starring at this questions to long!!
So, of the $9 million, $3.6 million is profit ie 40% profit
With $1.5 million still in inventory and 40% gross profit percentage, that gives us a pup of $600,000
Adjustments necessary are:
Cancel the first sale:
Dr revenue $4
Cr cost of sales $4Cancel second sale
Dr revenue $9
Cr cost of sales $9Adjust for pup in Southstar
Dr cost of sales $600,000
Cr combined inventory $600,000I believe that completes it!
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