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Dear sir,
Laurel acquired 60% shares of the rakewood sales from subsidiary to parent was $1.2m per month subsidiary made mark up on cost of 20% on sales . Parent had $1.8m of the goods in inventory
My question is why do v have to write PURP under net asset and y not in retained earnings ??
And sometimes v need to write PURP under retained earnings and not to mention in subsidiary why sir ?If the sale is from the parent to the subsidiary, the profit that is unrealised is reflected within the retained earnings of the parent
Thus, the adjustment is in the parent’s retained earnings
That adjustment is made by reducing the value of the (combined) inventory but the effect is in the parent’s retained earnings
So, for consolidation purposes, we shall:
Dr Cost of Sales (an increase in the cost of sales by reducing the closing inventory)
Cr Combined Inventory on the consolidated statement of financial positionBecause it’s the parent that made the sale and it’s the parent that has recognised the profit, it’s the parent’s retained earnings that are to be reduced
However, if the sale is from the subsidiary to the parent, the adjustment is made to the subsidiary’s retained earnings
The figure for combined inventory is still reduced and the figure for combined cost of sales is still increased
But, for the purposes of calculating the nci and the post-acquisition profits of the subsidiary to include within the consolidated retained earnings calculation, it’s the subsidiary’s retained earnings that are affected
Why? Because it’s the subsidiary that made the sale, it’s the subsidiary that has recognised this profit that has not been realised by sale to the outside world, so it’s the subsidiary’s retained earnings that are reduced
You may ask “Why is the adjustment not in the parent because (in this second case) it’s the parent’s inventory that is overvalued?”
Say the pup is $100 and the inventory for the parent and the subsidiary is $3,600 and $1,900 respectively and within that $3,600 is the pup of $100 recognised by the subsidiary
Does it make any difference to you, when we are calculating combined inventory, if I write:
$3,600 – $100 + $1,900 = $5,400, or
$3,600 + $1,900 – $100 = $5,400The overvalued inventory will be adjusted whether the adjustment is in the parent or in the subsidiary
But it’s important to eliminate that pup in the records and the retained earnings of the entity that SOLD those goods within which there is that rogue profit
Is that any better?
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