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Hi Mr MikeLittle
I have a question can you explain me answers of these questions step by step?Chicken Co owns 80% of Egg Co. Egg Co sells goods to Chicken Co at cost plus 50%. The total invoiced
sales to Chicken Co by Egg Co in the year ended 31 December 20X9 were $900,000 and, of these sales,
goods which had been invoiced at $60,000 were held in inventory by Chicken Co at 31 December 20X9.
What is the reduction in aggregate group gross profit?2 Major Co, which makes up its accounts to 31 December, has an 80% owned subsidiary Minor Co. Minor
Co sells goods to Major Co at a mark-up on cost of 33.33%. At 31 December 20X8, Major had $12,000 of
such goods in its inventory and at 31 December 20X9 had $15,000 of such goods in its inventory. What is the amount by which the consolidated profit attributable to Major Co’s shareholders should be
adjusted in respect of the above?
Ignore taxationCancel the intra-group trade (reduce aggregate revenue $900,000 and reduce aggregate cost of sales $900,000)
Now deal with the pup
Cost + 50% means that the profit element is 1/3 of the transfer value (50/150)
So pup in the Chicken / Egg question is 50/150 * $60,000 = $20,000 pup
ADD $20,000 to Egg’s cost of sales figure thus reducing the Egg gross profit
The intra-group trade has no affect on the gross profit of the group but the $20,000 pup will reduce that gross profit by that same $20,000
The same thinking applies to the Major / Minor question except that this time the question asks for the affect on the profit attributable to the parent’s shareholders
The pup is calculated at 33.33/133.33 * $12,000 = $3,000
So Minor’s profits decrease by $3,000
And Major owns 80% of Minor so the profit attributable to the Major shareholders will decrease by 80% * $3,000 = $2,400
OK?
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