HI Chris
Jarvis Co owns 30% of Mclintock Co. During the yearto 31 December 20X4 Mclintock Co sold $2 million of goods to Jarvis Co, of which 40% were still held in inventory by Jarvis at the year end. Mclintock Co applies a mark-up of 25% on all goods sold.
what effect would the above transection 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
My response to this question was C, credit group inventory $ 48,000, because my understanding was goods are in the parents inventory so we need to reduce the unrealised profit by our share here the 30% (2m*40%*25%/125%*30%) which is %48,000
is that wrong? if not BPP got it wrong
because I thought an associate company sold goods to parent who owns 30% of the associate. this goods have not been sold yet. it is in parent's inventory at the year end. so the Parent's inventory has to be reduced, where when the transection is parent sold goods to associate we debit group retain earning (on SFP) OR debit C.O.S (in SPL) and
Credit the investment in associate (reduce goods to cost to the group) since we didn't consolidate their inventory.
may be I misunderstood the question or they could be wrong. can you please clarify?
thank you
Ask the Tutor ACCA FR
associates PUP
BBP answer was D
Hi,
I've looked at it several times and unless I'm missing something daft then I'm pretty sure that you're right. If McLintock (associate) has sold to Jarvis (parent), then Jarvis (parent) owns the inventory at the reporting date and so the credit entry is to inventory.
So I'd not worry about it as your knowledge on associate PUPs seems perfectly correct.
Thanks
HI dear tutor,
I think that there is contrast between two questions in BPP revision kit.
Question:146
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
Answer: C
Explanation
(($2m × 40%) × 25 / 125) × 30% = $48,000 This adjustment is removing profit from inventory so it is a credit entry
Question:155
Plateau acquired 30% of the equity shares of Axle at a cost of $7.50 per share in cash.
Plateau is negotiating a contract to supply goods to Axle in the coming year (ended 30 September 20X8) at 20% profit. How will the unrealised profit on the sale of these goods be adjusted in the consolidated financial statements for the year ended 30 September 20X8?
A DR Share of profit of associates CR Group inventory
B DR Share of profit of associates CR Investment in associate
C DR Group inventory CR Share of profit of associate
D DR Investment in associate CR Share of profit of associate
Answer: B
Explanation
Axle is not a member of the group, so group inventory is unaffected.
In BPP study text there is the following NOTE
"Note that if the sale had been made by the associate to the group (an upstream transaction) the posting would have been exactly the same."
DEBIT Share of profit of associate (consolidated profit or loss)
CREDIT Investment in associate (consolidated statement of financial position)
Thereby I think that transactions between Jarvis Co and Mclintock Co will not affect the group inventry. Do you agree me?
Hi,
Yes, it appears correct.
Thanks
Hi,
may I asked about how to account for the intra group transactions between investor and associate of depreciable assets? Is it calculated by the same way as subsidiary:
if the investor sales to associate - the adjustment Is made:
Dt Group retained earnings
Kt Investment in associate
And where is this going in the statement of Profit or Loss? As a reduction in Cost of sales or share profit of associate.
and if the associate sales to investor - the adjustment is made for:
Dt Group retained earnings
Kt Non-current assets
Thank you!
Hi,
It is very rarely seen, as there are infrequent transactions of this type in the real world, but if it did occur then it would be treated using a very similar fashion. I'd not worry about it for FR as you will not see it.
Thanks
Sign in to reply to this topic.