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Dear Mike,
Q:
Frog acquired 80% of Tadpole on 01/04/20×7. The individual financial statement of Frog and Tadpole for the year ended 31/12/20×7 showed revenue of 280 000 and 190 000 respectively. In the post-acquisition period Tadpole sold goods priced at 40 000 to Frog. 50% of these goods were still in held in inventory by Frog at the end of the year.
What was the group revenue in the consolidated statement of profit or loss for the year ended 31/12/20×7?Solution:
Frog 280 000
Tadpole 142 500 (190000×9/12)
Intragroup (40 000)I don’t understand why we deduct the whole 40 000 as the half of these goods were sold???
Please kindly explain.
Many thanks,
Katalin
Included in Tadpole’s purchases was the figure for the original purchase of these goods
Tadpole then sold the goods for $40,000 to Frog
So those same goods are now in Tadpole’s revenue and Frog’s purchases
So, without any adjustment, we now have those same goods included twice within the respective purchases figures and once within revenue … until Frog sells them to the outside world
Ok, let’s assume Frog sells them for $45,000 to the outside world
Now we have the original purchase of, say, $32,000 in Tadpole’s records at cost to the group
Then we have $40,000 moving from one group company to another so included within both revenue (Tadpole) and purchases (Frog) is that $40,000
And finally we have, say, Frog selling those goods to the outside world for $45,000
So far as the group is concerned, when we treat all the companies within the group as though they were all one big combined company, there is just one purchase (for, say, $32,000) and one sale (for, say, $45,000)
And that’s why we have to eliminate the intra-group trade of $40,000 in full
The pup adjustment is another matter entirely and you’re correct that the pup is calculated only on those goods that are still in inventory as at the year end and, when we have a figure for the pup, we need to ADD that amount to the cost of sales figure in the records of the entity that has recognized that profit
OK now?
Thank you very much for the thorough explanation Mike. You are very kind.
My problem is that I am getting confused what to calculate and when, like in this question….
When you explained it is clear and easy but on my own I would have deducted the 20000…
For me it is hard to know what the question wants me to calculate….
I have to practice and practice and practice…
Thank you again!Have a nice evening.
Kind regards,
KatalinNo worries – remember these easy steps:
1) eliminate ALL 100% of any intra-group trade by reducing aggregate revenue and aggregate cost of sales, dollar for dollar ie completely ignore any pup implications as you carry out this step … reduce revenue by, say, $153,267 and, therefore, reduce cost of sales by $153,267 (or whatever figure it is that is the selling value of goods sold within the group)
2) calculate the amount of the pup
3) ADD that calculated pup on to the cost of sales for the selling entity – that has the effect of reducing the selling entity’s profits / retained earnings – the other aspect of that adjustment is to reduce the value of the aggregate inventory balance on the statement of financial position
Is that any better for you?
But you are correct, of course, the more you practice, the easier all this magic becomes 🙂
You are the best Mike 🙂
Thank you for your help 🙂 I really appreciate it!
Kind regards,
Katalin
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