PURP

Dear Kasia

I would break it down for you except that there are too many typing errors in your post 🙁

Please check it again, very carefully, and sort out your Ps and your Ss

Write soon

That’s better! Now it makes sense :-)). Nearly! I believe that you have made an error with the current accounts

In Spring’s records, are they showing $7 due FROM Parentis and in Parentis’ records, are we showing $4 due TO Spring! That now makes sense because Parentis has sent a payment of $4 to Spring but Spring has not yet received this payment.

Let’s deal with the non-agreeing current account balances first

I’m Parentis and you are Spring. According to my records, I owe you $4 but according to your records, I owe you $7. That’s because you don’t know it yet but there’s a payment on its way to you (not by electronic bank transfer – I’ve sent it by way of a checque by surface mail!)

When you eventually receive this cheque, you will Dr Bank and Cr your receivable-from-me account

After you have made that entry, your records will show an increase in the bank balance of $3, a decrease in the receivables of $3, and leave a receivable from me of $4

My records will show an amount payable to you of $4

When we consolidate, those two amounts of $4 (one in your receivables and the other in my payables) will cancel out

Now the intragroup trade

You sold $15 to me and recognised a profit of $6 on the transaction. I sold a lot of these goods to the outside world but I still have one third of them still in inventory. So far as I am concerned, these goods are correctly valued for my accounts purposes – they cost me $5

But for the consolidation, we need to include consolidated inventory at the lower of cost and net realisable value and tose goods that I bought from you include an element of profit that you have recognised but is still in realised so far as the group is concerned.

The pup is one third of $6 = $2 pup and it needs to be deducted from group profits and from group inventory

Let’s deal with the $15 trade. It’s in your revenue and it’s in my purchases / cost of sales. Reduce consolidated revenue by $15 and reduce consolidated cost of sales by $15

Now, turn your attention to the pup of $2

We need to reduce profit in the consolidated statement of profit or loss and we need to reduce inventory on the consolidated statement of financial position

To reduce the profit, we need to INCREASE the consolidated cost of sales and then decrease the combined closing inventory on the consolidated statement of financial position

Is that now ok?

You’re welcome