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Dear Tutor,
I have a question,
The question is, Hillusion acquired 80% of Skeptik on 1 july 2012. In the post ac period H sold goods to S at a price of $12m. These goods had cost H $9m. During the year to 30 Mar 2013 S had sold 10m of these goods for 15million.
How will this affect group cost of sales in the CSP/L of Hillusion for the Y/E 31 mar 2013?
The answer is Decrease by 11.5m and the working is
Decreace by 12
Increace (2m*25% profit margin = 0.5)and I dont really get it..
Why do we decreace by 12 and increace by 0.5 ?
And my second question ia how did we arrive to the calculation that profit margin is 25%?
Thank you!
Hi,
The $12 million of sales are an intra-group transaction that must eliminated, so we would DR Revenue CR CoS. The credit entry to cost of sales will decrease the expense.
The $0.5 million is the PUP adjustment, where we DR CoS CR Inventory. The debit entry will increase the expense.
The margin is calculated from the profit made on the intra-group sale. They were sold for $12 million and cost $9 million, so the profit is $3 million. The margin is the profit divided by the sale, so 25% (3/12 x 100%). This is then applied to the profit on the goods that have not been sold outside the group at the reporting date. Given that it says $10 million have been sold then $2 million worth are left (12 – 10).
Hope that clears it up for you.
Thanks
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