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Dear John,
Please see below.
Co WX acquired 75% of the equity share capital of YZ several years ago. At 31 March 20X6 WX had goods in inventory valued at cost of $60,000, that had been purchased from YZ at a mark-up of 20%. And the question is asking the effect on profit attributable to NCI and parent co. ans: NCI decrease by 2500 and Parent decrease by 7500
I believe I am missing a vital point here because my PURP calculation is wrong. I thought $60k is COS and not the Sales price. Therefore I calculated the unrealised profit as 20/100 x 60,000=12000 instead of 20/120 x 60,000=10000.
My PURP was wrong so the rest of it obviously went wrong too.The statement of “valued at cost” made me think that it is cos and not the sales price. I am not a native speaker so I might be having a disadvantage of not understanding it quite well due to language issues.
Could you please comment on this as your feedbacks are really helping me understand where I did wrong?
Many thanks in advance
Regards
MiaIf YZ sells to WX for $60,000 then as far as WX is concerned they have made sales of $60,000 and as far as WX is concerned the cost of the goods to them was $60,000. That is how both will be recorded in the individual accounts of the two companies.
However, $60,000 is not the cost from ‘outside’ (i.e. is not what WX had originally paid for them). When we prepare the consolidated accounts then if those goods are still in inventory we need to value them at the cost from ‘outside’ and remove the profit that YZ had added on when selling them to WX.
I hope that makes sense (if not then do ask again) 🙂
Have you watched my free lectures on consolidations? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Many thanks John. Yes, I have watched all of your FA lectures and still going back to them multiple times.
I think I confused myself a little too much in this question. The way I started to the question was completely wrong 🙁
I interpreted it as “YZ sold to WX for $72,000”. I better go through this section and practice more questions and re-watch your videos.
Appreciated your response.
Thanks
Mia
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