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Parent obtained 30% of the equity shares of Associate on 1 June 20×8 for $700,000. lt is able to exercise significant influence over Associate. During the year to 31 May 20×9 Associate made sales of $200,000 to Parent, priced at cost plus 25% mark-up. Parent still had 50% of these goods in inventory at the year end. Associate’s statement of profit or loss for the year ended 31 May 20X9 shows profit for the year of $650,000. What amount should be shown as investment in associate in the consolidated statement of financial position of Parent as at 31 May 20×9?
A $895.000
B $875.000
C $835,000
D $870,000The answer is:
“A.
Cost of investment 700,000
share of post-acquisition retained earnings
(650,000 x 30%) 195,000
895,000Note. The unrealised profit will be credited to group inventory, not investment in associate.”
Why we don’t adjust retained earnings for unrealised profit from 50% of inventory that is still in possession of Parent?
Shouldn’t we decrease RE of Associate by 20,000 (200,000×25/125×50%), therefore decreasing share of post acquisition retained earnings to 189,000?Hi,
As the associate sold the goods then the goods will be in P’s books at the reporting date and so we adjust the inventory line in the group SFP and not the investment in associate. The adjustment to profit is also through the group reserves and not those of the associate. The reason being is that it is the group that has influence over the transaction and not the associate.
Thanks
Hello keymaster.
I think something is wrong with the answers given.
Shouldn’t EQUITY ACCOUNTING simply mean that we only deal with matters impacting EQUITY leaving the rest alone?
If so, the associate has PUP which should be removed from share of associate’s profit.The solution seems to have some issues.
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