- August 1, 2020 at 4:40 pm #578919yellowtingParticipant
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 #579597P2-D2Keymaster
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.
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