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Hi,
I would like to ask a question about intragroup trading.
According to the tutorial, when it comes to cash in transit for consolidated statements, there are two steps to take, the first one is to assume the cash has been received (receivables are reduced accordingly), the second step is to eliminate payables and receivables on both P&S sides. Thus it has an effect both on P&S assets and liability separately.
In the BPP practice book Q245, S sent a cheque to P where P did not receive at the reporting date. I assume this is the same situation as cash in transit. However, according to the answer, it is considered no effect since “asset in the subsidiary is exchanged for the asset in the parent”.
At the same time, the question also includes unrealised profit in inventory, where it states, P made $25,000 sales (25% of $100,000) on credit to S and the gross profit margin is 20%. As far as I understand the $100,000 sales is revenue, so to calculate the unrealised profit it should be ($25,000/(1+20%))*20%, wherein the answer, it simply used $25,000*25%.
I’m really confused by the answer and I would really appreciate some help.
Thank you in advance!
Hi,
In Q245 in the BPP text, what is the question asking you to do? This will lead us to the right answer that they have given. You are correct in your understanding of cash in transit but need to apply it to the specific question in the BPP text.
For the unrealised profit then we should take 20% of the sales value of inventory that is still held at the reporting date.
Thanks
Hi sir, this is the question from BPP..
Platt Co has owned 60% of the issued equity share capital of Serpi Co for many years. At
31 October 20X7, the individual statements of financial position included the following:Platt Co Serpi Co
$ $
Current assets 700,000 500,000
Current liabilities 300,000 200,000Neither had a bank overdraft at 31 October 20X7.
During the year ended 31 October 20X7, Platt Co made $100,000 sales on credit to
Serpi Co. Serpi Co had one-quarter of these goods in inventory at 31 October 20X7.
Platt Co makes a 20% gross profit margin on all sales.On 31 October 20X7, Serpi Co sent a cheque for $50,000 to pay all of the outstanding
balance due to Platt Co. Platt Co did not receive this cheque until 2 November 20X7.Platt Co’s policy for in-transit items is to adjust for them in the parent company.
In respect of current assets and current liabilities, what amounts will be reported inPlatt Co’s consolidated statement of financial position at 31 October 20X7?
Answer: Current assets $1.195 million and current liabilities $0.5 million
OK, so what is the question here that you are asking. You’ve just copied an entire question and given the answer. Let me know what you are struggling with and I can gladly help you out.
Thanks
Hi sir, regarding the BPP question above,
Why they did not do adjustment for the cash in transit?
Hi,
They will have adjusted for the cash in transit by DR Bank CR Receivables but one side of the entry increases current assets and the other decreases current assets. The net impact is of nil on the group current assets and hence why it looks like there is no adjustment.
Thanks
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