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Hello,
The notes says : ONLY amounts owing to/from OUTSIDE the group shd be included in csfp n ANY ASSET shd be stated at COST to the group.
From what i have understood, when it comes to a sale /despatch of goods from a parent co. to its subsidiary (n vice versa), the transaction cannot be recorded at a profit because a parent n its subsidiaries exist as a single entity.
That said, questions often say that goods are sold at a mark up or at a margin.
My questions are:
(1) Why does the the Parent co. sell to its subsidiary at mark up/ margin in the first place?
(2) And why is this transaction recognised as a sale and not as a simple “transfer of goods” from one warehouse to another since that’s what it seems to be?
(3) From what i understand, there is no cash involved. The transactions r recorded in respective current a/cs. So if a sale was made from a parent to its subsidiary at a mark up n part of the goods were sold to customers, only the portion of goods unsold to customers is the pup. What abt those sold to customers, aren’t they still goods that were bought from the parent co. (still the one from whom inventory is accounted at cost)? Why does it matter whether the goods were sold or not to customers, the pup is between the parent n its subsidiary n whether the goods r sold or not to outside customers do not change the fact that ” assets should be stated at cost in the group”, right?
Thank you.
1 To make a profit
2 Because it’s two companies, it’s not an inter-warehouse movement
3 The parent buys, sells to sub, the sub sells to the outside World. the group has achieved a profit
But if some goods are still n inventory at the end of the year, the profit on the sale from parent to sub has not been realised so far as the group is concerned. So the profit recognised by the parent when it sold to sub needs to be eliminated
OK?
U mean the parent co. always makes an unrealised profit when selling to its sub n if the goods are not sold by the end of the year, the whole unrealised profit is eliminated.
N if say 2/3 of the goods r sold to outside customers, it woud mean that 2/3 of the unrealised profit made at first when selling to sub has been realised. Therefore both parent n sub can safely recognise the realised portion of the transaction n eliminate the unrealised profit made on the remaining yet unsold 1/3.
Is that correct?
This mayb outside the scope of F7 but if the following year, the rest of the goods is sold, is the eliminated pup reinstated to a/c for the realised profit?
Yes, but at the end of the second year there will probably again be unrealised profits so the provision MOVEMENT is the only matter which is accounted for. There is a provision brought forward, and we can calculate the provision we need to carry forward, so the reduction to the retained earnings of the seller will be just the movement in the provision
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