Provision for unrealised profit — OpenTuition Forums

RRainy_days8y ago

Hi, I come across a question about preparation of consolidated statement of financial position. But I don't understand how is the PURP calculated. Xandra acquired 1.6 million (out of 2 million) of Yale’s ordinary shares five years ago for $2.25 per share. During the year Yale Ltd sold goods to Xandra at a mark-up of 50%. The goods cost Yale $90,000. At the year ended one-third of these goods remained in inventory. Provision for unrealised profit (45,000 x 50/150) = (15,000) Thanks.

John MoffatTutor8y ago#1

If 1/3 of the goods remained in inventory, then the cost to Xandra was 1/3 x 90,000 = 30,000. This is what Yale will have sold them for, and since they were selling at cost + 50%, then the profit included in the 30,000 is 50/150 x 30,000 = 10,000. This is the unrealised profit. (If your book gives the unrealised profit as 15,000, then either it is wrong, or you mistyped the question (maybe 1/2 the goods remained in inventory)) I do suggest that you watch my free lectures on consolidations, because calculation of the PURP is explained, with examples. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.

RRainy_days8y ago#2

Thank you for your detailed explaination. I think the answer is wrong.

John MoffatTutor8y ago#3

You are welcome :-)

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