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Question:
“After the acquisition Sentinel sold goods to Prodigal for $40 million. These goods had cost Sentinel $30 million, $12 million of the goods sold remained in Prodigal’s closing inventory.”The answer is a 3000 addition to cost of sales and a 3000 addition to retained earnings.
I am hopelessly lost with this. Can you explain?Now, i feel that with every question including an intragroup trading, i get so lost and never get it right. Is there a simple explanation for this concept that i am just not getting? Or is there a relevant lecture that you could point me at (i have listened to all previously)?
Thanks in advance
Pages 48 and 49 of the free course notes should help, and the example Petras and Signe example 2 on page 49
With Prodigal and Sentinel, we have the profit equation as:
Cost + Profit = Selling Price
30 + 10 = 40So profit is 1/4 of selling price …
… and there are 12 selling price goods in inventory at the year end …
… so there must be 3 worth of pup (1/4 x 12)
the adjustment is to ADD the pup to cost of sales and reduce inventory on the statement of financial position
The adjustment to cost of sales works its way through to the statement of financial position by way of a REDUCTION in retained earnings … not an addition as you have written
The adjustment is in the records os Sentinel so that will affect the post-acquisition profits in Sentinel and that, in turn, affects the working W3 consolidated retained earnings and working W5A non-controlling interest on the statement of financial position
Work your way through the mini-exercises towards the back of the F7 course notes, pages 204 and 205
OK?
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