Question 1
Pan owns 70% of Peter. Peter sells goods to Pan at cost plus 40%. The sales to Pan in the year ended 31 Jan 2011 were $110000 and 50% of these goods still remained in inventory by Pan. Calculate the provision for unrealised profit.
Explanation:
The cost is $110000 x 100/140 = 78571. Since 50% is still in inventory, the unrealised profit should be 78571 x 50% = 39286.
Question 2
A has a 80% owned subsidiary, B. B sells goods to A at a margin of 20%. At 31 Dec 2011, A has $50000 inventory remained unsold at year end. Calculate the provision for unrealised profit.
Explanation:
B sold goods to A at $50000 (its a cost for A, but selling price for B). For B, the cost for A is 80% of 50000 = $40000. The unrealised profit is $40000 x 80%(share) = $32000.
Am I correct?
ACCA Forums
FAF3: Consolidated Financial Statement- Inter entity transaction
You really need to watch Sir John Moffat's free lectures on Consolidation. All the calculations and adjustments regarding unrealised profit are explained in those lectures.
As far as these 2 questions are concerned, you're mixing up Cost with Profit. In question 1, the figure of $78,571 is the COST, not the PROFIT.
The profit is $110,000-$78571=$31,429.
Since 50% of this inventory is still remaining, so 50% of that profit is also unrealised. The amount of unrealised profit will be
$31,429*50%=$15,715
Similarly in question 2, the figure of $40,000 is COST. The profit is
$50,000-$40,000=$10,000
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