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BPP Example:
A Co, a parent with subsidiaries, holds 25% of the equity shares in B Co. During the year, A Co makes sales of $1,000,000 to B Co at cost plus 25% mark-up. At the year end, B has all these goods still in inventories.
Solution:
Unrealised profit: 1,000,000x 25/125 = $ 200,000
DEBIT Cost of Sales (consolidated profit or loss) 50,000
CREDIT Investments in associate (consolidated statement of financial position) 50,000If associate made the sales to parent,
DEBIT Cost of Sales (consolidated profit or loss) 50,000
CREDIT Inventories (consolidated statement of financial position) 50,000My doubt is whether debit should be to cost of sales. I thought it should be revenue. What do you think Sir?
PUPs on inventory are ALWAYS added to cost of sales (debited) – that increases the cost of sales and therefore reduces the profit. The adjustment is an adjustment to the value of inventory – it’s not an adjustment to revenue
Hi,
I also do not understand why do we need to debit COS.
I saw on another book, the treatment according to the book would be (if I interpret it correctly):
Dr Sales 250,000
Cr Purchase 200,000
Cr Investment in associate 50,000The book is: Consolidated Financial Statements, International Edition, by Professor Tan Liong Tong, pg 363 (https://books.google.com.sg/books?id=-Wd3AAAAQBAJ&pg=PA363&lpg=PA363&dq=Elimination+of+unrealised+profit+in+sales+to+associate&source=bl&ots=DTE53XtDmn&sig=FkADxO4ZodMnAyy8fwZNk0qyfI0&hl=en&sa=X&ei=deSTVMSIBKO2mwXEy4DADQ&ved=0CDAQ6AEwBDgK#v=onepage&q=Elimination%20of%20unrealised%20profit%20in%20sales%20to%20associate&f=false)
Please advise, thanks so much.
This is what I call “the short cut” approach. When I teach it, I insist that students do the cancellation $ for $ (in your example I would cancel $250,000 from both revenue and from purchases) and then do the pup adjustment of $50,000 by ADDING $50,000 to cost of sales
HOWEVER!!!!!! If it’s an associate transaction (either as buyer or seller) THEREE IS NO CANCELLATION OF REVENUE AND PURCHASES!
The entry to record the sale will be in the buying company’s records:
Dr TNCA at cost to the buying company
Cr Selling company Current Account (or cash)In the selling company’s records the entry will be:
Dr Buying company Current Account (or cash)
Cr Disposal Account (having previously transferred the nbv of the asset to the Disposal Account)Then Dr Disposal Account
Cr Profit or Loss with the profit on disposalThat credit to profit or loss includes the pup element on the transfer so, to get rid of that pup for the consolidation, we now must:
Dr Selling company profit or loss (retained earnings)
Cr TNCAOk?
Dr Retained Earnings
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