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Hi Sir, the following question is from BPP, and I have no idea how to answer the question, please suggest. Thank you!
Premier Co acquired 80% of Sanford Co on 1 June 20X1. Sales from Sanford Co to Premier Co throughout the year ended 30 September 20X1 were consistently $1 million per month. Sanford Co made a mark-up on cost of 25% on these sales. At 30 September 20X1 Premier Co was holding $2 million inventory that had been supplied by Sanford Co in the post-acquisition period.By how much will the unrealised profit decrease the profit attributable to the non-controlling interest for the year ended 30 September 20X1?
Hi,
Let’s work this through step-by-step together and see how we get on.
The question wants us to look at how the unrealised profit will impact the NCI. So, let’s not worry about the impact on NCI, let’s just look at what the unrealised profit figure is.
Unrealised profit is he profit that is in the group accounts on unsold inventory between group entities. Here $2 million are still held. So, what is the unrealised profit? Have a go at calculating it and let me know your answer so that we can move to the next stage of the calculation.
Thanks
The unrealised profit should be (1-1/1.25)*2=0.4 million, is it correct?
Thank you sir
Correct! Good start.
Now we need to think of who sold the goods to who? Did P sell to S? Or, did S sell to P?
Why is this important? If P makes the sale then there will be no impact on the NCI as the adjustment goes through P’s accounts. If S makes the sale then there is an impact on the NCI as we adjust S’s accounts and the NCI will have their share of S’s profit for the year, including the PUP calculated above.
See if you can now get the impact the PUP has on the NCI.
Thanks
1)55% owned but can appoint 3 out of 10 directors = associate or subsidiary?
2)45% owned but has arrangements with other shareholders to manage the operating and financing policies = associate or subsidiary?
3)45% owned and no company owns more than 1%
associate or subsidiary?
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