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Dear Sir,
here’s the task and the solution. I guess the solution is wrong, am right?
Thank you.
Ruby owns 30% of Emerald and exercises significant influence over it. Emerald sold goods to Ruby for
$160,000. Emerald applies a one third mark up on cost. Ruby still had 25% of these goods in inventory at
the year end.
What amount should be deducted from consolidated retained earnings in respect of this transaction?SOLUTIUON (printed in book)
($160,000 / 4) × 25% × 30% = $3,000I PROPOSE THIS SOLUTION
($160,000 / (1+1/3)) × 25% × 30% = $9,000160,000, one quarter still left in inventory = 40,000
Mark up of one third = a pup fraction to apply of 1/3 / 4/3 = 1/4
So the unrealized profit on the closing inventory is 10,000
Ok so far
Emerald sold the goods, Emerald is an Associate, so adjust in Emerald’s retained earnings by reducing the ret ears by the pup of 10,000
Ruby will then calculate Ruby’s share of Emerald’s post acq profits and come up with a figure that has been reduced by 30% of 10,000
So the group retained earnings had taken a pup hit of $3,000
What you have done is calculated the cost of those goods as being 3/4 x 160/4 = 30,000 and then taken the group’s share of that cost.
The idea of a pup calculation is to find the unrealized PROFIT and then adjust the provision so that the figure carried forward into the next accounting period is that amount of unrealized profit on the closing inventory
Is that ok?
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