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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?
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%=$15,715Similarly in question 2, the figure of $40,000 is COST. The profit is
$50,000-$40,000=$10,000
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