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Hi,
Ive gone blank on a question, please can you help..
If company A sells goods to company B for £500,000 at a mark up of 30%. Company A normally makes a mark up of 70% on its sales. By the year end this sales invoice is outstanding. Mrs Jones owns 100% of the equity shares in Company A and is a director of company B.
How would the transaction be accounted for in the financial statements for the year?
Well! Where to begin? The question doesn’t rule out the possibility that Mrs Jones has control over company B as well as being just a director.
If that’s the case, then company B should be consolidated as a subsidiary
Even if it isn’t a subsidiary, there is a relationship between companies A and B by dint of Mrs Jones interest in company B and her ownership of company A.
If 500 have been sold at a mark up of 30% then clearly 100/130 x 500 is the cost price of these goods and should normally be sold for:
100/130 x 170 is approximately 1,300
So normal selling price would be 1,300
If we ARE to consolidate, then we need to determine the original entries that recorded the sale, compare those entries with what should have been recorded had it been a transaction at arms length, and then make adjustments on consolidation for the differences and particularly the difference in the pup calculation
Is that enough?
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