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Hello, John
X co acquired 80% of the equity share capital in Yco on 31 July 20X6. Extracts from the two companies’ statements of profit or loss for the year ended 30 September 20X6 were as follows:
revenue X co: 3400000 Y co: 2400000
Cost of sales X co: 1500000 Y co: 1800000during the year ended 30 September 20X6, Y co sold goods for $ 5000 each month to X co., at a mark up of 25%. At the end of the year X co had 50% of these goods left in inventory.
What is the group gross profit for the year ended 30 September 20X6?
To get an unrealized profit,
sale price is $10,000, cost price is $8,000 so gross profit is $2,000. Then unrealized profit to the parent company is 2,000x 50%x 80% = $800.But unrealized profit in the answer sheet is $1,000($2,000×50%). Why don’t they consider the percentage of share capital?
In X’s own SOFP the inventory will appear at the cost to X which was $5,000 (50% x $10,000), because that is what X has been charged for it by Y.
However in the consolidated SOFP, the inventory needs to appear at cost to the group, and since this inventory has not been sold externally the cost to the group must not include the profit that X had recorded on the sale – the group as a whole has not made any profit on these goods.
The profit that X had recorded on the sale of these goods was $1,000 and so this is the unrealised profit and the cost of the goods to the group is only $4,000 (50% x $8,000).
It does not matter what the % of share capital is – we need to remove all of the profit on the inventory that still remains.
Have you watched my free lectures on consolidations? 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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