Example 3 – Unrealised Profit – Group SPL Chapter 24

Hi Chris,

With reference to the example question, it says that “Nick sold $10m goods to Gary at a mark-up of 25% on cost, one quarter of these goods are in inventory at the year end.”

I read this meaning Nick sold the goods to Gary at $12.5m. Doesn’t this mean then the unrealised profit should be $625k? I calculated this by this logic:

if no inventory was sold (i.e. all are still in Gary’s inventory), then the unrealised profit should be $2.5m (inventory cost to Gary = $12.5m, and cost of sales to Nick was $10m). So if 1/4 are not yet sold, then the unrealised profit would be 1/4 * $2.5m = $625k.

And likewise, if Nick sold the goods to Gary at $12.5m, shouldn’t the adjustment to Revenue and Cost of Sales for consolidation be $12.5m (i.e. debit Revenue by $12.5m / credit COS by $12.5m)?

Additionally, I am struggling to understand why the PUP needs to be reflected under Nick’s account at consolidation but not under the ‘adjustment’ column likewise with the adjustment for the intra-group revenue and cost of sales.

Much appreciated your guidance in advance!

Regards,
Tim