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Chapter 24 – Example 3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Chapter 24 – Example 3

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by P2-D2.
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  • August 1, 2020 at 4:40 pm #578919
    yellowting
    Member
    • Topics: 11
    • Replies: 4
    • ☆

    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.

    August 8, 2020 at 8:04 am #579597
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    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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