consolidated p/l intra group associate

No impact on sales in either case (because A is not a group company)

No impact on cost of sales in either case ( ” ” ” ” ” ” )

Pup is the group’s share of the overall pup calculation and is debited to consolidated retained earnings within the Associate’s column in working W3 and credited against Investment in associate in working W5A

OK?

“if its Associate to parent

Dr Expenses ( reducing associate’s profit )[p/l] / Consolidated reserves [sofp]
Cr Inventory

is it correct adjustment?”

No, sorry. We need to calculate the group’s share of the pup. Once we have that figure, debit consolidated reserves (debit cost of sales) and credit Investment in Associate

The quick, simple and easy way to adjust for the group’s share of the pup is to put the full pup (not just the group’s share) against the Associate’s retained earnings in working W3. That reduces the Associate’s post-acquisition profits. Then, for working W5A (Investment in Associate) take “value at date of acquisition”, add on the “group’s share of the Associate’s post-acquisition retained” (from working W3) and “deduct any impairment”

The only problem with this quick, simple, easy way is that although the consolidated retained earnings figure is correct, the make up of that consolidated figure will differ from printed solutions that calculate the group’s share of pup and deduct from the parent without affecting the Associate’s post-acquisition retained earnings.

Working W5A also has a different “Share of A’s post-acq retained” and then, from that the printed solutions deduct the applicable group’s pup share

At least, that’s what I think they do. I can live with the quick, simple, easy way!

But that unrealised profit is included within the amount that the parent has recorded as a purchase within its cost of sales account and is included within the parent’s closing inventory valuation. That’s why the adjustment goes through cost of sales – it’s because the parent’s inventory is over-valued by the extent of the pup. But, because the associate is not a group company, the adjustment is restricted to just the group’s share of this associate-recognised profit which is not realised

I’m intrigued by your suggestion that we should increase some other expense. I’m toying with the idea of maybe increasing the telephone expense or even possibly the bad debts expense. Wages and salaries? Salesmen’s commissions? The options are endless!

🙂

No, the reduction in the retained earnings caused by the parent’s inventory being over-valued is by reducing the parent’s share of the associate’s profits.

When a parent sells to a SUBSIDIARY at a profit and some goods are still in inventory, although it’s the subsidiary’s inventory that is overvalued, the adjustment goes through the records of the company recognising the profit

But when an associate is involved, it is appropriate to reduce earnings only by the group’s share of the unrealised profits and that is easiest done by putting the full pup in the associate and then calculating the parent’s share of that associate’s profits

When parent sells to associate and when associate sells to parent, the entry to be effected is to eliminate the group’s share of the pup.

The easiest way to achieve this is to put the full pup through the associate’s profits. That reduces the associate profit for the period and the parent will then calculate the group’s share of that reduced profit

That has the effect of eliminating the group’s share of the pup that arises from a transaction with an associate

That share of the reduced profit is itself the subject of a further entry. The entry is:

Dr Investment in associate (through working W5B)
Cr Consolidated retained earnings (through working W3)

Nothing in group inventory

Now, you’re going to turn round and say that others do it differently and I’m going to agree

But my way is radically easier and noticeably quicker even though the solution that you reach will be immaterially different than other answers

Your choice!

OK. However, if the parent sells to the subsidiary, the full pup adjustment is through the parent

It’s only when the subsidiary sells to the parent that the full adjustment goes through the subsidiary

In the case of a pup with an associate, it doesn’t matter whether parent sells to associate or associate sells to parent. The entry is still through the associate

One more question. How is dividend received from associate and subsidiary treated in the consolidated statement of financial position

Wow thanks..