Goods in transit

Hello Sir,

In the following question there is a sale has to be recorded at $ 100,000 so they debited the inventory and credited payables that’s fine ,but why this $ 100,000 is not affecting the cost of sales in their answer,

please help to me to clear this ambiguity ,

Thank you very much,

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Boo Co acquired 80% of Goose Co’s equity shares for $300,000 on 1 January 20X8. At the date of acquisition
Goose Co had retained earnings of $190,000.
On 31 December 20X8 Boo Co despatched goods which cost $80,000 to Goose Co, at an invoiced cost of
$100,000. Goose Co received the goods on 2 January 20X9 and recorded the transaction then. The two companies’
draft financial statements as at 31 December 20X8 are shown below.
The fair value of the non-controlling interest in Goose Co at the date of acquisition was $60,000.
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X8
Boo Co Goose Co
$’000 $’000
Revenue 5,000 1,000
Cost of sales 2,900 600
Gross profit 2,100 400
Other expenses 1,700 320
Profit before tax 400 80
Income tax expense 130 30
Profit for the year 270 50
Other comprehensive income:
Gain on revaluation of property 20 –
Total comprehensive income for the year 290 50

STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 20X8

$’000 $’000
Assets
Non-current assets
Property, plant and equipment 1,940 200
Investment in Goose Co 300 –
2,240 200

$’000 $’000
Current assets
Inventories 500 120
Trade receivables 650 40
Cash and cash equivalents 170 35
1,320 195
Total assets 3,560 395
Equity and liabilities
Equity
Share capital 2,000 100
Retained earnings 500 240
Revaluation surplus 20 –
2,520 340
Current liabilities
Trade payables 910 30
Tax 130 25
1,040 55
Total equity and liabilities 3,560 395

Required
Prepare a draft consolidated statement of profit or loss and other comprehensive income and statement of financial
position. It is the group policy to value the non-controlling interest at acquisition at fair value.

Answer:
BOO GROUP – CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X8
$’000
Revenue (5,000 + 1,000 – 100 (W5)) 5,900
Cost of sales (2,900 + 600 – 100 + 20 (W5)) (3,420)
Gross profit 2,480
Other expenses (1,700 + 320) (2,020)
Profit before tax 460
Tax (130 + 30) (160)
Profit for the year 300
Other comprehensive income
Gain on property revaluation 20
Total comprehensive income for the year 320
Profit attributable to
Owners of the parent 290
Non-controlling interest (20% × 50) 10
300
Total comprehensive income attributable to
Owners of the parent (ß) 310
Non-controlling interest 10
320
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8
$’000 $’000
Assets
Non-current assets (1,940 + 200) 2,140
Goodwill (W2) 70
Current assets
Inventories (500 + 120 + 80) 700
Trade receivables (650 – 100 (W5) + 40) 590
Cash and cash equivalents (170 + 35) 205
1,495
Total assets 3,705

$’000 $’000
Equity and liabilities
Equity attributable to owners of the parent
Share capital 2,000
Retained earnings (W3) 520
Revaluation surplus 20
2,540
Non-controlling interest (W4) 70
Total equity 2,610
Current liabilities
Trade payables (910 + 30) 940
Tax (130 + 25) 155
1,095
Total equity and liabilities 3,705

Workings

1 Group structure
Boo Co
80%
Goose Co

2 Goodwill
$’000 $’000
Consideration transferred 300
Fair value of non-controlling interest 60
360
Fair value of net assets:
Share capital 100
Retained earnings 190 (290)
Goodwill 70

3 Retained earnings
Boo Co Goose Co
$’000 $’000
Per question 500 240
Unrealised profit (W5) (20)
480
Less pre-acquisition (190)
50
Goose: 80% × 50 40
Group total 520

4 Non-controlling interest
$’000
NCI at acquisition 60
NCI share of post-acquisition retained earnings (50 × 20%) 10
70

5 Intragroup issues
Step 1: Record Goose Co’s purchase
DEBIT Cost of sales $100,000
CREDIT Payables $100,000
DEBIT Closing inventory (SFP) $100,000
CREDIT Cost of sales $100,000
These transactions can be simplified to:
DEBIT Inventory $100,000
CREDIT Payables $100,000
Step 2: Cancel unrealised profit
DEBIT COS (and retained earnings) in Boo $20,000
CREDIT Inventory (SFP) $20,000
Step 3: Cancel intragroup transaction
DEBIT Revenue $100,000
CREDIT Cost of sales $100,000
Step 4: Cancel intragroup balances
DEBIT Payables $100,000
CREDIT Receivables $100,000