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Hi
I need some help understanding this part of the Perkins Co question in my Kaplan exam kit please. (it says the question is from Mar/Jun 2018)
During the period from 1 Jan 20X7 to 1 Sept 20X7, Perkins co sold $1m of goods to Swanson Co at a margin of 30%. Swanson Co had sold all these goods on to third parties by 1 Sept 20X7.
b) Remove the results of Swanson Co and the gain on disposal of the subsidiary to prepare a revised statement of profit or loss for the year ended 31 Dec 20X7 for Perkins Co only.
In the answer for revenue we take the 20X7 consolidated revenue of 46,220 and subtract 8 months of S’s revenue and then add back the 1,000 we would have normally eliminated as an intra group sale. However, I dont understand why for cost of sales we take the consolidated COS of 23,980 and subtract 8 months of S’s COS but do not add back the 1,000 which we would have normally eliminated too.
In the note given in the answer it says:
Originally, the intra group sale resulted in $1m turnover and $0.7m costs of sales. These amounts were recorded in the individual financial statements of P Co. On consolidation, the $1m turnover was eliminated – this needs to be added back. The corresponding $1m COS consolidation adjustment is technically made to Swanson Co’s financial statements and so can be ignored here.Im not sure what this means, could you please explain it in a simpler way?
Thank you
Because we are speaking about drawing up only the parent’s SPL and it was the parent who sold the goods.
This means that the Consolidated SPL has already considered the elimination so we adding back the Revenue of 1m earned by the Parent.
And this also means that the adjustment to the COS line is not applicable as it resides in S’s books (we are drawing up parent’s books remember).
Keep in mind, what you are doing is adjusting group statement by removing subsidiary’s PL to arrive at parent’s.
So by removing S’s revenue you are left with P’s revenue but adjustment for revenue realised by parent was already in – so add it back.
But, by removing S’s costs you end up with COS that were also adjusted BUT the adjustment relates to S, as the 1M is cost to S (and we have just removed it). The cost to the Group AND to P is 0.7M and it’s already in.What I do not understand in this question however, is that it is said that GAIN on disposal of S is in OPEX. And in solution it increases our OPEX thus reducing the Profit. I can’t wrap my head around it as it should be vice versa… Dr Consideration received, Cr Carrying amount of S, Cr Gain on disposal.
Am I missing something?
Thanks for ur answer, Im still kinda confused idk why I still dont get it, I guess I just need to think about it a bit more.
And about the operating expenses, im not 100% sure but i think this is why they did it:
So basically it says that the gain on disposal is currently included in operating expenses, its a gain so to include it in operating expenses they must have reduced the operating expenses originally thus increasing profit. So when we are removing S’s results we do the opposite and add it back to reduce profit.
Thanks for reply!
But gain on disposal is anyway parent’s item, so it should be left untouched.
They say it is included in consolidation, but should be in individual statement of P, we are trying to arrive at P’s statement by adjusting consolidation thus this gain by P (already accounted for in consolidation) should be left there…I guess we both walk away confused 🙂
Maybe tutor will reply and make things clearer
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