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Dear Mike,
If P sold goods worth 40,000 at markup of 20% to S => profit of inter entity trade = 40000 X 20% = 8000.
Therefore in Cons. Income statement, Revenue & cost of sales will be reduced by $40,000 and we will add profit of $8000 to cost of sales. isn’t it?No! In your example we have some inconsistencies
1) When P sells goods to S worth $40,000 that suggests that the sale price is $40,000. For $40,000 to be interpreted as the cost, the question would read “P sold goods to S that had cost P $40,000 …… ”
2) If the sales price of these goods is $40,000 and that figure includes a mark-up of 20%, then the cost price to P of those goods must have been 100/120 x $40,000 = $33,333
3) The cancellation of the sale (whether it was a sale for $40,000 or for $48,000) is correct – reduce revenue by the sale price ($40,000 or $48,000 whichever one is the correct sale price) and reduce also cost of sales by that same amount
4) Then add to cost of sales the $8,000 (if the total sale price was $48,000) or by $6,667 – where the total sale price was $40,000
Is that ok?
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