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MikeLittle.
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- November 3, 2017 at 5:20 am #414171
Good morning sir.
AB has owned 80% of CD for many years. in the current year ended 30 june 20X3,
AB has reported total revenues of $ 5.5 M , and CD of $ 2.1 M. AB has sold goods to CD during the year with a total value of $1M. Half of these goods sold remain in year-end inventorieswhat is the consolidated revenue figure for the AB group for the year ended 20 june 20X3?
my answer is 7.1 M cuz
P is seller
Revenue 1m
profit 500,000( cuz they said half of the inventories remain)7600
(1000)
500
7100 is my answer.but the real answer is 6600
5.5+2.1-1 = 6.6
why isn’t the unrealised profit considered to get the answer?
November 3, 2017 at 6:06 am #414172We have a bit of a conceptual problem here (in fact, 2 problems)
1) “Revenue 1m
profit 500,000( cuz they said half of the inventories remain)”Profit????
What makes you think that the entire $1 million intra-group sale was at zero cost to AB? and that therefore half the goods sold had a profit of $500,000 (and presumably the remaining half had another $500,000 profit)
You have confused the 3 elements of a sale:
cost + profit = selling / transfer price
When we are consolidating the revenue figure, we are looking at … group revenues (and nothing at all concerning costs nor profits)
So here the group revenue is the selling value of goods sold to the outside world and that comes out as:
$5,500,000 + $2,100,000 less that $1,000,000 sold within the group
Note, the FULL $1,000,000 was included within the revenue figure for AB
Now, problem 2)
Within the revenue line we have dealt with the final element of a sale … the selling / transfer price
What we now must do is eliminate the unrealised profits and, by doing so, we shall reduce the consolidated cost of sales down to the figure for cost of sales for the entire group
Step 1 is to eliminate the intra-group sale / purchase of $1,000,000
Well, we have already reduced the revenue by $1,000,000 so now all we need do is reduce the costs of sales line by that same $1,000,000
So that adjustment now reads:
Reduce (Dr) Revenue $1,000,000
Reduce (Cr) Cost of sales $1,000,000And that deals with the intra-group sale … except for the fact that, within the closing inventory figure there is an element of unrealised profit in the inventory that was sold intra-group and, to eliminate that unrealised profit (say $100,000) we need to ADD that $100,000 to the combined cost of sales and, by doing that, we have increased the cost of sales by the pup and reduced the combined profit figure
However, your post related only to the combined revenue figure and that is, very simply, AB revenue + CD revenue – the revenue from sales within the group
Do NOT make any adjustment in the revenue line for any goods as yet unsold at the year end
Is that better?
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