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Hello
Green Co is an associate undertaking of Purple Co. Purple Co owns 30% of the shares in
Green Co, and has done so for many years. During the year ended 31 December 20X4,
Green Co made a net profit of $1.5 million. Green sold goods to Purple Co during the year
with a value of $2 million, and half are still in Purple’s inventories at year end. All the goods
were sold at a margin of 30%.
Purple has recognised previous impairments in relation to its investment in Green Co of
$225,000. In the current year, Purple wishes to recognise an additional impairment charge
of $35,000.
What is the share of profit of associate to be shown in Purple’s consolidated statement of
Profit or Loss?
A $100,000
B $115,000
C $325,000
D $415,000.1. The answer is C.
2. The working in the book is as follows:
Share of Net Profit: 30% * 1,500,000 450,000
Share of PURP: 30%*[(2m*50%)*30%] (90,000)
Current Year impairment (35,000)3. Could you explain why PUP has been deducted?
-It’s the associate selling to the company. Why should we remove the PUP?Hi,
If there is a transaction between the associate and parent then we need to remove the influence that we have over the profit, so effectively our share of the PUP.
The associate has made the profit through the sale, hence the share of the PUP is removed from its books.
Thanks
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