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Dear Chris,
Regarding Chapter 24 – Example 3, I do not understand how to derive the value of PUP.
Question stated : During the year Nick (S) sold $10m goods to Gary (P) at a mark-up of 25% on cost. One quarter of those goods are in inventory at the year end.
I understand the part to eliminate i/co sales (Dr Sales $10m, Cr COGS $10m). The remaining stock left is $500k ($10m x 25/125 x 1/4). Which I do not understand why is it part of PUP if it is the remaining stock left in the group.
Appreciate your help. Thanks in advance.
Hi,
We only eliminate the profit sold on the goods that remain in group inventory as the profit made has not yet been made outside of the group. There is a lecture explaining this principle.
To calculate the profit we have to apply the 25% mark up to the $10m sales price, hence the 25/125. As it is a mark-up the profit is 25% of the cost and using a cost structure the profit will be 25/125 of the sales price.
The final PUP is rthen based upon what is left in inventory, which is the one quarter, hence the 1/4.
Thanks
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