P has owned 60% of issued equity share capital of S. At 31 Oct 2007 the individual statements of FP include:
P’s Current Assets $700,000
P’s Current Liabilities $300,000
S’s Current Assets $500,000
S’s Current Liabilities $200,000
During the year ended 31 Oct 07, P made $100,000 Sales on Credit to S. S had one quarter of these goods in inventory at 31 Oct 07. P makes a 20% gross profit margin on all sales.
On 31 Oct 07, S sent a cheque for $50,000 to pay all of the outstanding balance due to P. P did not receive this cheque until 2 November 2007
Answer = Current Assets $1.195m and Current Liabilities $0.5m
I know the PURP = (1/4 x 100,000 x 0.2) = $5000
But how did they arrive at the answer especially the Current Liabilities
Can you please go through it and give me the rationale please
I don’t understand
I did not arrive at same answer. Buy here's my solution though:
CA (P +S + Transit - IntraBalance - Up)
(700+500+50-150-5). 1095
CL 400
Reply with a correction please!
Thank you.
Current liabilities would be the two added together less any inter company adjustments which would be the balancing payment on account (S paid $50,000 cash in transit to pay off the outstanding amount) therefore $200,000 + $300,000 + $50,000 - $50,000 which makes the $0.5m.
Current Assets would be $700,000 + $500,000 + $50,000 - $50,000 - $5,000 to make the $1.195m. This is P + S - intercompany balance (as above) + cash in transit - PURP.
For the Current Liabilities , why did you add the 50,000 ?? Whats your rationale ?
Apologies, I read the question wrong - the only adjustments to Current liabilities would be to add S and P together. There won't be any inter company transactions as S has paid the creditor off via the $50,000 in transit. Therefore 0.2 + 0.3.
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