[elenetm]

Thanks again, but I still do not understand the issue.
Sorry for disturbing one more time :):).

The real terms of the case included the loan received by X Company from Z Company – (an ultimate controlling party of X), amounting 50 mln in total. The loan was interest free and from a related party therefore there was an evidence that the fair value differed from transaction price. In order to calculate the fair value of the loan for initial recognition, I have discounted the future contractual cash flows at Company’s cost of debt. Present value equaled 32 mln.

My question refers to the accounting treatment for the other 18 mln.
I assume that this amount is an excess cash due to favorable terms of the loan agreement. This is contribution by an ultimate controlling party which does not imply an obligation of repayment in future.

If the loan had been taken from the real shareholder of the Company instead of its ultimate controlling party, I would consider the excess amount as an additional paid in capital, but now I’m confused.

How should I account for this 18 mln?

[elenetm]

P.S. I am interested in proper accounting treatment for the Standalone Financial Statement of X Company, not consolidated.

[elenetm]

Hi,

Thanks for a timely response!

But no, X has no contractual obligation of cash outflows in future and therefore the transaction is not a loan by nature. Suppose that it was something like grant gifted.
Should it be accounted as an additional paid in capital or gain in this case?

[elenetm]

Sorry, forget.
I already answered myself.

Profit was made by an associate but left inventory is held by the parent. So, despite the fact that we are not combining financial figures of an associate and the parent company, we still need an adjustment – we have to eliminating profit earned from the PARENT’S left inventory.

In case left inventory was held by an associate (parent was the seller), we would not have to carry out an adjustment ON INVENTORY, am I right?

[elenetm]

OK, thanks a lot!!

One more question regarding Intra group trading, now about associates.

Jarvis owns 30% of McLintock. During the year to 31 December 20X4 McLintock sold $2 million of goods to Jarvis, of which 40% were still held in inventory by Jarvis at the year end. McLintock applies a mark-up of 25% on all goods sold.
What effect would the above transactions have on group inventory at 31 December 20X4?
A Debit group inventory $48,000
B Debit group inventory $160,000
C Credit group inventory $48,000
D No effect on group inventory

The answer is C.

As it is mentioned in the problem Jarvis owns 30% of McLintock. Therefore I assumed that McLintock is an associate of Jarvis, not subsidiary. If so, why are we adjusting group inventories? As far as I am concerned, in the consolidated financial statements we do not combine figures of parent company and its associate, instead of this we have a one line entry for parent’s share in associates. Should group inventories still be adjusted? Why?

[elenetm]

I understand that we have to eliminated ONLY the unrealized profits (not profits earned from the transaction when goods were resold to the other world), but the way how unrealized profit is calculated still does not make sense for me.

Imagine we have goods sold by parent to the subsidiary after acquisition:

Parent:
Revenues 100
COS (80)
Profit 20

60% of these goods were resold by the subsidiary to the other world at a sales price of 80.

Subsidiary:
Revenues 80
COS (100*60%) = (60)
Profit 20

As far as I understand the issue, we have to carry out the following procedures:

1. Eliminate 100 from Revenue (due to I transaction)
2. Eliminate 80 from Cost of Sales (due to I transaction)
3. Adjust COS of resold goods (deduct amounts to receive its original COS, before I transaction had taken place).
(60-80*60%)=12 – to be deducted from cost of sales.
4. Adjust balance of total remained inventories.
40*20%=8 – to be deducted from balance of inventories.

Net effect on the profit calculated:
+100-80-12=8

The same case would be solved by the book more easily, like:
Net effect on the profit:
40 (left inventory) * 20% (mark up) = 8

Figures calculated by me always equal to the answers in revision kit.
That makes me think that I understand the issue and I am solving the problems in a complicated, by still in a right way.
I just do not understand the logic under calculating the PURP in a way in which it is done in the book. Most of all, I do not understand how is that my answers calculated in a way presented above, always correspond to the answers in the book???? I am almost sure that it is magic.

btw, thanks for timely response 🙂

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