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Example 1
Platt Co has owned 60% of the issued equity share capital of Serpi Co for many years. At 31
October 20X7, the individual statements of financial position included the following:
Platt Co ($) Serpi Co ($)
Current Assets 700,000 500,000
Current Liabilities 300,000 200,000Neither company had a bank overdraft at 31 October 20X7.
Examiner’s report – F7 March 2018 2
During the year ended 31 October 20X7, Platt Co made $100,000 sales on credit to Serpi Co.
Serpi Co had one-quarter of these goods in inventory at 31 October 20X7. Platt Co makes a 20%
gross profit margin on all sales.
On 31 October 20X7, Serpi Co sent a cheque for $50,000 to pay all of the outstanding balance due
to Platt Co. Platt Co did not receive this cheque until 2 November 20X7.
Platt Co’s policy for in-transit items is to adjust for them in the parent company.Ans : CA – 1.195mn CL – .5 mn.
I can see that the unrealised profit alone has been set off, but my doubt is why the PURP alone is adjusted why is the CA and CL not adjusted with 100000 each. It is a credit sale so CA would have been debited with 100000 and CL with 100000 when we consolidate shouldn’t we remove this?
At the time of the sale, you are correct that Platt would have Dr Receivables and Cr Revenue and Serpi would have Dr Purchases and Cr Payables
But why do you think that this amount is still receivable / payable as at the year end?
The question specifically tells you that “Serpi Co sent a cheque for $50,000 to pay all of the outstanding balance due …”
I emphasise “… to pay ALL of the outstanding balance due …”
That $100,000 worth of transactions took place, according to the question, “During the year ended 31 October 20X7 …” so could have taken place as early as November 2016 and it’s only now, at the year end, that Platt has asked Serpi to settle the remaining outstanding amount of $50,000
OK?
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