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X Co acquired 80% of the equity share capital in Y Co on 31 July 20X6. Extracts from the two companies’ statements of profit or loss for the year ended 30 September 20X6 were as follows:
X Co ($000) Y Co ($)
Revenues 3400 2400
cost of sales 1500 1800During the year ended 30 September 20X6, Y Co sold goods for $5 000 each month to X Co, at a mark up of 25%. At the end of the year X Co had 50% of these goods left in inventory.
What is the group gross profit for the year ended 30 September 20X6?In future, please do not simply ask me to provide a full answer – say which part of the answer you are not clear about, and then I will help you!
I assume that you have watched my free lectures on this (the lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well).
The total sales from Y to X during the year are 5,000 x 12 = 60,000. Therefore the groups revenue and the groups cost of sales are both reduced by 60,000.
50% of the goods remained in inventory, which means that the selling price of these goods from Y to X was 30,000. There was a mark-up of 25% in arriving at the 30,000 and so the PURP is 30,000 x 25/125 = 6,000. This needs to be removed from the groups profit (and as you will know from the lectures, we achieve this by increasing the groups cost of sales).
Therefore the total group revenue is 3,400 + 2,400 = 5,800
The total group cost of sales is 1,500 + 1,800 + 6 = 3,306Therefore the groups gross profit = 5,800 – 3,306 = 2,494.
If the answer in your book is different, then either you have not copied out the question correctly, or there is indeed an error in the answer in your book 🙂
(Do please let me know 🙂 )
dear Sir,
Thank for the working, well i guess we should take the subsidiary’ profit just for two month as what i have learn the profit and sales before the date of acquisition are not taken into account for group
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