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Hi,
I have come across two questions that in my dyslexic brain reads exactly the same, however, the answers are different and I am struggling to understand why. Would you be able to help, please?
1) Catfish has owned 75% of Shark for a number of years. During the year to 31 December x8 Shark sold goods to Catfish for $75,000. Castfish resold 40% of these goods by the year end. Shark applies a 25% mark-up on all sales.
By what amount should the consolidated retained earnings of Catfish at 31 December x8 be reduced in respect of these intragroup sales?
Answer:
There is 60% left in stock soooo…. $75,000 x 60% /125 x 25 x 75% = $6,750
2) Frog acquired 80% of Tadpole on 1 April x7. The individual financial statements of Frog & Tadpole for the year ended 31 December x7 showed revenue of $280,000 and $190,000 respectively. In the post-acquisition period Tadpole sold goods priced at $40,000 to Frog.
50% of these goods were still held in inventory by Frog at the end of the year.What was group revenue in the consolidated statement of P&L for the year ended 31 December x7?
Answer: $280,000 + ($190,000/12×9) – $40,000 = £382,500
This is where I am completely baffled.
In Question 2) 50% of inventory has been sold, therefore 50% is remaining…
So why isn’t the answer $280,000 + ($190,000/12×9) – ($40,000 x 50%) = $402,500.What am I missing?
Thanks
Because question 2 requirement is to find the group revenue figure and the full $40,000 is included within Tadpole’s revenue figure
It is irrelevant for the purposes of determining revenue how much of those intra-group sales are still in inventory
The adjustment for the closing inventory of intra-group sales affects the cost of sales figure, not the revenue
Question 1 is asking for the adjustment for consolidated retained earnings so is different from question 2 which asks for consolidated revenue
OK?
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