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Hi, in this question we are asked to remove the effect of subsidiary from our statement of profit and loss, one adjustment was this :
For several years, Saachi Co (Subsidiary) has provided a consultancy service to Parul Co, for which it invoices $400,000 per month. Parul Co includes this as an operating expense and pays
Saachi as soon as it receives the invoiceIt has been acquired for four months so the adjustment they did in the answer was to add 1600 in operating expenses which is reasonable but they have also increased the parent revenue by 1600 which I don’t get, kindly help me in this regard.
Hi,
What is an expense in one set of books will be income in the other for the provision of the services. So, Parul has the expense having used the service and Saachi has the income from Parul having provided the service and been paid for it.
Thanks
What is it that you specifically don’t understand from the answer given above?
Hi Chris,
I’m confused with this one too. Its the Parul Co section C Ratio Analysis question where the parent has acquired a sub and we need to get back to the individual statement in order to compare like for like with the prior year.
If we have the consolidated accounts and we are trying to get back to the individual accounts then we would add back the 1600 expense in the parents books.
But the other 1600 relates to the revenue in the subs books (as S sold to P), so if we are trying to get back to the individual accounts of the parent then why would we add it back to the revenue in the parents books (as the revenue would have been deducted on consolidation from S’s revenue in S’s books)?
In a different question (Perkins) where there has been a disposal of a sub the solution only makes the one sided adjustment when trying to get back to the individual accounts. So its a bit confusing.
Hi,
Is the 1600 not a consolidation adjustment that has reduced the group revenue and the group cost of sales? The entry would have been to DR Revenue and CR Cost of Sales with equal amounts. If so, then we would need to add back this revenue to get to the figure in the individual accounts (i.e CR Revenue) to reverse out the original intra-group adjustment made. Hope that clears it up, and let me know if it doesn’t.
Thanks,
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