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Hello,
Parket Co acquired 60% of Suket Co on 1 January 20X7. The following extract has been taken from the individual statements of profit or loss for the year ended 31 March 20X7:
Parket Co Suket Co
$’000 $’000
Cost of sales 710 480
Parket Co consistently made sales of $20,000 per month to Suket Co throughout the year. At the year end, Suket Co held $20,000 of this in inventory. Parket Co made a mark-up on cost of 25% on all sales to Suket Co.
What is Parket Co’s consolidated cost of sales for the year ended 31 March 20X7?The answer:
710,000 + (480,000 x 3/12) – (20,000 x 3) + (20,000 x 25/125) = $774,000why the amount of subsidiary purchases (20,000×3) not included first with the subsidiary cost of sales 480,000 before time apportionment .
in other words it should have been ((480,000-(20,000×3))×3/12
Isn’t the subsidiary purchases part of its cost sales ?What makes you think that it’s NOT included?
“Isn’t the subsidiary purchases part of its cost sales ?”
Yes, cost of sales is an amalgam of opening inventory + purchases – closing inventory
But there’s nothing in this question to suggest that the 12 months’ worth of sales to Suket have not been included in Suket’s cost of sales calculation
OK?
I mean that :
(480,000 x 3/12) – (20,000 x 3)the above formula should have been :
(480,000 – “20,000 × 3”) × 3/12why haven’t been that way?
in other words : the amount of (“20,000 × 3”), why not multiplied by 3/12 the acquisition period of the financial year ?
The cost sales amount of $480,000 is including the purchases of $60,000
therefore, we first eliminate the $60,000, and the remaining will multiplied by 3/12?
what is the other viewpoint?Why eliminate the $60,000? That’s three months’ worth of sales / purchases intra-group. There was nine months’ worth before the acquisition so, in total, there is $240,000 sales to Suket within that revenue / cost of sales figure
Why not simply do a time apportionment – 9 months pre and 3 months post?
We consider only the post acquisition of 3 months, this what is related to the parent.
As we need to do the time apportionment only for the joint part of 480,000, but the 60,000 is not joint part, so it will be eliminated first.
So, we will take out the $60,000 from the $480,000
and the remaining ($480,000-60,000) = $420,000 , then we will do the time apportionment : 420,000× 3/12 = $105,000Sorry, for prolongation
Concentrate on this $480,000
Of this amount, 12 x $20,000 represents sales to Suket = $240,000
Time apportion the REMAINING $240,000 into $180,000 pre-acquisition and $60,000 post acquisition
Now time apportion the sales to Suket into $180,000 pre-acquisition and $60,000 post-acquisition
Ok, out of that $480,000 we now have 2 x $180,000 pre-acquisition and 2 x $60,000 post acquisition
Now eliminate the post-acquisition intra-group sales of 3 x $20,000 = $60,000 to eliminate
So where does that leave us?
Hello Mike,
At the exam today, the sales were from the subsidiary to the parent, and there was URP from inventory still kept by the parent.So, for the consolidated cost sales: we have to add the URP to the cost sales of the parent, then add the cost sales of the parent, and the sub cost sales time apportinate. ok?
For the revenue, will the sales will be eliminated separate from the apportion time for the subsidiary revenue, or eliminated first to its revenue then the apportion time will done on the net ?
thanksIt depends upon whether the two entities traded together before the acquisition (as they did in the example that started this thread)
Coop, ignore it. It’s gone! Why beat yourself up over something that you cannot change?
It’s like fighting death … it will happen, no matter what you do or how many questions you ask. It will happen
So let F7 exam be a thing of the past. Sleep well. Don’t worry about what you might have done differently – it’s too late
Hi. I can’t understand in this question why in answer 20000* 25/125?? What it represent??
Have you watched the F3 lectures by John or the F7 lectures by me that deal with mark-up and margin?
Apparently not
This line from the original post tells you the answer!
“Parket Co made a mark-up on cost of 25% on all sales to Suket Co.”
Check out the free course notes, particularly the top of page 49
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