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Hi Mike,
I’m a little unsure about the accounting treatments for transactions with an associate:
UNREALISED PROFIT:
In CSOPL,
Add group’s share of PUP to Cost of salesIn CSOFP,
1) Deduct group’s share of PUP from ‘investment in associate’2) Deduct group’s share of PUP from ‘group retained earnings’
Associate pays dividends:
In CSOPL,
Deduct group’s share of dividends from investment income (IF the parent has not recorded it, no entries would be needed)In CSOFP,
1) Deduct group’s share of dividends from ‘investment in associate’2) no adjustment needed for group retained earnings (?)
UNREALISED profit on assets:
(Regardless of whether it is an upstream or downstream)In CSOPL,
Add group’s share of PUP to & deduct group’s share of depreciation from Cost of salesIn CSOFP,
1) Deduct group’s share of PUP from & add group’s share of depreciation to ‘group retained earnings’2) Deduct group’s share of PUP from & add group’s share of depreciation to ‘investment in associate’
Have I gotten them right?
Yes, all ok … except this bit “Have I gotten them right?”
What on Earth is ‘gotten’?
This sounds like something Donald would say
Alright thank you!
Oops- is gotten not a word? Have I been embarrassing myself all this while? I must have 🙁
‘Gotten’ is an Americanisation – in the same stable as ‘off of’ as in “I had gotten off of the tram”
Hi Mike,
Is the accounting treatment for an associate transaction the same regardless of whether it is an upstream or downstream transaction?
Question: BPP study text question bank MCQ QNS 11
Python obtained 30% of the equity shares of Cobra on 1 June 2008 for $700,000. IT is able to exercise significant influence over cobra. During the year to 31 May 2009 cobra made sales of $200,000 to Python, priced at cost plus 25% mark up. Python still had 50% of these goods in inventory at the year end. Cobra’s SOPL for the year ended 31 May 2009 shows profit for the year of $650,000.
What amount be shown as investment in associate in the consolidated SOFP of Python as at 31 May 2009?
Answer:
Cost of investment $700,000
Share of post tax profits $195,000
Investment in associate $895,000Explanation; PUP should be credited to group inventory, not investment in associate
I deducted the PUP amount of $6,000 from the investment in associate and got $889,000..
My pup calculation suggests an amount of pup 50% x $200,000 x 25/125 = $20,000
If I deduct that from the Cobra profits I arrive at $630,000 and 30% of that is $189,000
Thus I arrive at an Investment in Associate of $700,000 + $189,000 = $889,000
I’m afraid that this is where the BPP (and Kaplan) methods both separately differ from mine
Fortunately this is a BPP question and thus answered in the BPP way
I’m sure that, if you gave the mcq to a Kaplan student, you’d get a different solution
Wow I didn’t know there were other acceptable methods as well but I think I’ll use your way of answering because a similar MCQ question came up in a past paper and the answer calculated it exactly like how you have done.
Thanks for the help! 🙂
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