Group cost of sales – Kaplan MCQ Hillusion

I always taught this as a two-step exercise – I believe that it makes it clearer, easier and quicker

Step 1 is to cancel the intra-group trade, dollar for dollar

If I sell goods to you for $35,267, what is the cost to you of those goods? ie how much will you record as your purchase?

Clearly the answer must be $35,267

So, step 1 is to eliminate from revenue and from cost of sales the invoiced value of that intra-group trade … Dr Revenue $12 million Cr Cost of Sales $12 million

Step 2 is to calculate the pup

The structure / equation for any sale is:

Cost + profit = selling price

In Hillusion’s case this gives us the equation

9,000,000 + 3,000,000 = 12,000,000

so 1/4 of the invoice value is the profit element (3/12)

We’re told that S has sold $10 million out of that $12 million that S bought from H, so there is $2 million still left in S inventory

And, of that $2 million, we know that 1/4 is the profit element and that computes to $500,000

the adjustment for a pup is to ADD the pup to the selling entity’s cost of sales (ie we decrease the value of closing inventory and that increases cost of sales, reduces profits and reduces the value of inventory on the statement of financial position)

So, concentrating solely on the combined cost of sales figure, we reduced it by $12 million and we increased it by $500,000 giving a net decrease of $11,500,000

OK?