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Winter Co purchased 80% of Summer Co on 1 July 20X6. Winter Co made sales of $1,000,000 to Summer Co during 20X6 that were spread evenly through the year. At the year end of 31 December 20X6 20% of these were still in inventory. Winter Co sells its goods on a 25% profit margin.
The correct answer is A.
Answer A recognises that only half the sales were made when Summer Co was a subsidiary. Intra group sales is $500,000 = $1,000,000 × 50% because half of the trading was before Summer Co was purchased by Winter Co. Therefore, removal of intra-group sales would be DR Sales $500,000, CR Cost of sales $500,000.
Unrealised profit is $50,000 = $1,000,000 × 25% × 20%.
Removal of unrealised profit would be DR Cost of sales $50,000, CR Closing inventory $50000.
Shouldn’t the answer be Dr Sales 500000 Cr Cost of sales 475000 Cr Inventory 25000
Since we are calculating Unrealised profits on post acquisition intra-group transaction?I have one more question. Why do we deduct dividend received from associate from the figure we show for investment at cost plus post acquisition profits in associate in the consolidated SOFP?
But, in the consolidated SOPLOCI, dividends are included in parent share of associate profit for the year. why?
The unrealised profits are only the profit on those goods remaining in inventory at the end of the year. The rest of the inter-group sales have been sold externally and therefore the profit on these has been realised by the group as a whole.
Have you watched my free lectures on consolidations? They cover everything needed for the Paper FA exam 🙂
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