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Hello Sir,
I am struggling to understand a part of questions about intra group pup (mini exercises at the end of course notes)
I take out the exact figure which is going to be reduced as retained earning and inventory but which company’s? Holding’s, Subsidiary’s or Associate’s? I was under the impression that both retained earnings and inventory reduced in the company which is actually selling goods but its not the case as per answers. Please explain…
Thank you so muchThere are two distinct ways of dealing with pups that arise from a sale between a group entity and the associate
I ALWAYS deal with such pups … whichever entity it is that is selling the goods and recognising the pup … by deducting the full amount of the pup from the retained earnings of the associate
The dual effect is a reduction in the value of the parent entity’s investment in the associate
Dr Consolidated Retained Earnings
Cr Investment in AssociateSo my adjustment doesn’t have any affect on group inventory
By putting the adjustment always through the associate, I automatically reduce the associate’s retained earnings and thus automatically reduce the parent’s share of those earnings and I have therefore automatically eliminated the group’s share of the pup that arose from a transaction with the associate
This is clearly explained in the course notes!
OK?
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