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Dear Mr. John,
Can you please clarify whether BPP answer is correct for below question?
Mercedes Co has owned 100% of Benz Co since incorporation. At 31 March 20X9 extracts from their individual statements of financial position were as follows.
Mercedes Co: Share Capital $ 100,000, Retained Earnings $ 450,000.
Benz Co: Share Capital $ 50,000, Retained Earnings $ 120,000.During the year ended 31 March 20X9, Benz Co had sold goods to Mercedes Co for $ 50,000. Mercedes Co still had these goods in inventory at the year end. Benz Co uses a 25% mark up on all goods.
What were the consolidated retained earnings of Mercedes Group at 31 March 20X9?
BPP answer is $ 450,000 + $ 120,000 – $ 10,000 = $ 560,000.
My answer is $ 450,000 + $ 120,000 = $ 570,000. I think the provision for unrealised profit shouldn’t be substracted from Group’s Retained Earning because it’s subsidiary that made a profit, not the parent.
Thanks,
KevinThe BPP answer is correct.
You are right in saying that it was the subsidiary that had recorded the profit.
So the consolidated retained earnings are all the retained earnings of Mercedes (450,000) plus their share (100%) of the retained earnings of Benz less the PURP (120,000 – 10,000).
If you have not yet watched them, then do watch my free lectures on this. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
Hi John, I am hoping you will respond to this. My answer was D) 557, 500
To find the PUP, I did 25% of 50,000 which is 12,500. Maybe I am missing something but how did you arrive at $10,00 as PUP? Thanks in advance.
The question says that there is a 25% mark-up on cost.
Therefore if the cost is $100 they add on $25 and sell for $125.
For every $125 that Benz sells to Mercedes, the profit will have been $25.
Benz sold the inventory to Mercedes at a price of $50,000. Therefore the profit included in the $50,000 is 25/125 x $50,000 = $10,000.
I suggest that you watch my free lectures on mark-ups and margins. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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