Consolidated Cos

Hi Kay,

With the intragroup sales always think that there are two adjustments that you need to make. The first one is to eliminate 100% of the intragroup sales. So, in the example above this is the £12m and where we would DR Revenue CR Cost of Sales. Thus reducing both accounts. Always remember that we do this regadless of whether the goods are still in inventory at the year end or not.

The second one is to eliminate any profit made (PUP) by selling the goods intragroup. So, in the example above the initial sale made a profit of £3m (12-9) but some of these goods have been sold outside of the group and hence some of the profit is realised. The key here is how much has been realised so that we can look at what has not been realised and therefore eliminated.

Here we are told that £10m of the goods have been sold (profit realised) and so £2m of the goods have not been sold (12 – 10). Based on this then 2/12 of the profit has not yet been realised giving us 2/12 x £3m = £0.5m. With this figure we then DR Cost of Sale CR Inventory.

That last adjustment is more tricky with the numbers than what we normally see in the exam, so don’t worry too much about the calculations, the key is to understand the two separate adjustments being made.

Hope that helps in some capacity. Let me know if you need anything further.

Thanks.