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I have just done the mock exam paper. Section B Q1 (d) “The following table shows factors to be considered when determining whether a parent-subsidiary relationship exists:
A. Significant Influence
B. Control
C. Non-controlling interest
D. Greater than 50% of the equity shares being held by an investor
E. 100% of the equity shares being held by an investor
F. Greater than 50% of the preference shares being held by an investor
G. 50% of all shares and all debt being held by an investor
H. Greater than 50% of preference shares and debt being held by an investor.
Required: Which of the above factors A to H illustrate the existence of a parent-subsidiary relationship (4 marks).”
So I answered: “A, B, D, G”. The correct answer was B, C, D, E. I’m happy enough with B & D, but C & E?. I thought the idea was that there was a controlling interest and also that the holding of more than 50% of preference shares as opposed to ordinary shares wouldn’t count for much. Can you advise please?C is a bit of a trick – if there is a non-controlling interest then it must mean that there is a controlling interest and therefore a parent-subsidiary relationship.
For E, equity shares are ordinary shares and so 100% ownership means there is control.
how about G sir? I thought if 50% of all shares and debts being held by the investor so therefore the relationship of parent and subsidiary does existed
“During the year ended 31 October 20X5 Black sold goods which originally cost $12 million to Bury.
Black invoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at
31 October 20X5.”Calculate the unrealised profit on sale
I could not type the entire question here… Black is the parent and Bury is the subsidiary. The answer is 1440000 and I don’t understand how. Please help me out because I think there is some sort of error in that answer, it’s from the revision kit.
There is no error.
The goods originally cost $12M, so it means that Black had paid that much for them.
They sold them to Bury at cost plus 40%, so they added on profit of 40% x $12M = $4.8M when they charged Bury.
30% of these goods are still in inventory, so the unrealised profit is 30% x $4.8M = $1,440,000
Sir is the 40% the mark-up? I treated it as mark-up:
Sales= $3.6M (30% × 12M)…..140%
Cost of sales= ?…..100%
Gross profit= ?….40%Therfore gross profit= 40×3.6M/140 (from cross multiplication)= $1,028,571.4
That’s why my answer was quite different. Pls help me see my mistake. However, if we treat 40% as margin we get $1440000 as you calculated.
It is a mark-up.
They originally cost Black $12M and Black added a mark-up of 40% of what they cost them.
Check my previous reply again.
Ohk, thank you so much. There was another similar question I saw which confused me:
“During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were
invoiced at cost plus 20%. Half of the goods are still in Northon’s inventory at the year end.What is the unrealised profit on intragroup sales?
$40,000
$48,000
$20,000
$24,000”Can you please help me work out the answer. The revision kit states that the answer is $20,000 while I am getting $24,000 and I followed everything that was involved in my previous question.
I will really appreciate your help
This question does not say that the original cost was $240,000. It says that they were invoiced to Norton for $240,000.
Therefore the profit was 20/120 x 240,000 = 40,000 and therefore the unrealised profit is 1/2 x 40,000.
Oh ok, so is it always the invoice value which is the price at which the goods were sold to the buying entity (the selling price)?
The wording of the questions are really confusing but thanks for helping me understand
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