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Subsidiary transfers goods to the parent at price of $18000 (mark-up of 50%) out of which two thirds remained in the inventory at the year end.
The current account stood at $22000 of the parent and subsidiary on that day.I did remove the unrealised profit of $4000 from the inventory and the retained earnings.
Why did they remove $22000 from the receivables and payables when only two thirds remained of $18000?Please explain.
Hi,
Good work on removing the correct PUP, that would be enough to see you pass this part of the question. So, don’t get too worried that you didn’t get the aspect on the SFP.
With the PUP we are eliminating any intragroup profit as it has yet to be realised outside of the group. The outstanding current account balance needs to be eliminated in full, regardless of the amount of goods sold/still held in inventory. This balance is entirely due between the parent and subsidiary, so is entirely intragroup and needs to be eliminated in full plus there is no profit aspect to it to think about either.
Hope that clears it up.
Thanks
I thought only $18,000 balance is to be eliminated as this was given in question, whereas they have already stated that $22,000 current account balance was outstanding between parent and subsidiary.
Didn’t read the question properly, sorry!
Thanks for the reply.Don’t worry in this instance about not reading the question carefully, just read the real exam questions carefully and you’ll be fine.
Good luck!
hi
if we bring down inventory by 4k , we would have 4 k less assets and 4k more COGS that brings R/E down by 4k
which combined with the 4k we reduced from the R/E of the seller we have ultimately reduced 8k in consolidation!
i’m confusedHi,
No, you are not adjusting for the 4,000 twice. It is being done once in the SPL and then this would feed through to the RE in reality when the group accounts are being prepared. In the exam questions we don’t prepare the full set of accounts, i.e. SFP and SPL so we therefore need to adjust the 4,000 in the SPL via CoS and the the RE in the SFP.
Thanks.
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