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Hi I have a question regarding Provision for Unrealised Profit. The question says
Each month since acquisition, Paradigm’s sales to Strata were consistently $4·6 million. Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4·6 million) of these goods in inventory at 31 March 2013. Paradigm’s normal mark-up (to third party customers) is 40%
I watched the lecture regarding this question and in the answer I see $600,000 of URP (4,600 x 15/115) in the inventory, my first question is if 4,600 is one month’s supply and the intra group transaction has been going on since acquisition, which is 6 months, why don’t we calculate the URP in the inventory as 4,600 x 6 x 15/115? And my second question is how would this be treated in the statement of profit or loss? Although a statement of profit or loss is not required by the question.
Thanks a lot.
I have one more question, one of the adjustment says Strata’s current account balance with Paradigm at 31 March 2013 was $2·8 million, which did not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata on 28 March 2013, which was not received by Paradigm until 3 April 2013
In the answer 3700 is deducted from the receivables and 2800 is deducted from trade payables. And I don’t get why.
My understanding of cash in transit adjustment is that the payment that is made by one party to another is deducted from the consolidated receivables and added to cash or bank under current assets. And the amount that is outstanding after the payment, is deducted from both receivables and payables.Am I wrong?
Another question! Sorry for asking so many questions. In the answer, under NCA a depreciation of 500 has been added to PPE. why is that? Don’t we Always subtract depreciation?
Another thing I fail to understand, even after solving so many questions and watching lectures is the calculation of Consolidated retained earnings and NCI. In every question, I see different elements being added and subtracted in the calculations. Is there a format or something that can help me with this? For instance in this question, while calculating Consolidated retained earnings unrealised profit is being subtracted and in the previous question (dec 2013) URP was added in the calculation of Post acquisition NCI.
Kindly clear this confusion for meThanks a lot.
“why don’t we calculate the URP in the inventory as 4,600 x 6 x 15/115? ”
Does this extract from the question answer your problem?
“Strata had one month’s supply ($4·6 million) of these goods in inventory at 31 March 2013”
“how would this be treated in the statement of profit or loss?”
In the same way that all intra-group transactions and pups are dealt with
Remove the intra-group trade by reducing revenue and cost of goods sold by 6 x $4,600
Then address the issue of the pup by increasing cost of sales and reducing inventory by $600
“My understanding of cash in transit adjustment is that the payment that is made by one party to another My understanding of cash in transit adjustment is that the payment that is made by one party to another is deducted from the consolidated receivables and added to cash or bank under current assets. And the amount that is outstanding after the payment, is deducted from both receivables and payables.. And the amount that is outstanding after the payment, is deducted from both receivables and payables.”
So, according to you, the $900 “is deducted from the consolidated receivables and added to cash or bank”
And then, according to you, “the amount that is outstanding after the payment, is deducted from both receivables and payables.”
Have I understood that, according to you, the $900 cash in transit has been deducted from receivables and the remainder of $2,800 has been deducted from receivables and deducted from payables?
Is that what you’re saying?
So, before I go further, just let me combine those two ….
$3,700 has been deducted from receivables and $2,800 has been deducted from payables
Am I correct so far?
Oh, yes, I am – I know I am because that’s the same as you wrote in your post …”In the answer 3700 is deducted from the receivables and 2800 is deducted from trade payables. And I don’t get why.”
Now then, please remind me of the bit you don’t understand – it will save me from having to scroll up and down the screen trying to find the question again
“a depreciation of 500 has been added to PPE. why is that? Don’t we Always subtract depreciation?”
No, we don’t always subtract depreciation – here’s an example of where we don’t
Why has depreciation been added? Before I answer, let me ask you a question …. why isn’t the fair value adjustment on the plant added into the combined plant figure in the consolidation? Why is it deducted?
“in the previous question (dec 2013) URP was added in the calculation of Post acquisition NCI.”
Is this possibly because the post-acquisition performance of Southstar was a loss? And the pup increases that loss?
“Is there a format or something that can help me with this? ”
If you’ve watched endless videos of me working through past exam consolidations, you know very well that there is a format!
It’s the working W3 song!
H’s own
+ H’s share of S post-acq retained
– Goodwill impaired since acquisition (just our share)
Nothing changes. All you have to do is apply the song to the circumstances
OK?
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