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Good day Sir,
I’m currently using KAPLAN study text for FFA.
I got confused while studying PURP treatment in Consolidated SOPL. In the question under “Test Your Understanding 2” on Page 355, it is mentioned that the Parent P sold goods worth $20,000 to Subsidiary S. The profit was $5,000. Only 20% of these goods sold and the remaining 80% were unsold at the year end.
This leaves us with a PURP of $4,000. P has purchased 75% of S’s shares.
In the Consolidated SOPL, they’ve subtracted $3,000 ($4,000*75%) from Cost of Sales.
When i did a different practice question from BPP (parent to subsidiary sale), they’ve subtracted the whole amount instead of proportion.
I’m confused as which amount to consider when making CSOPL.
Thanks in advance.When there are inter-company sales, we do two things.
First, we subtract the whole of the sales (of 20,000) from both the total sales and from the total cost of sales (because we only want to show sales and cost of sales external to the group).
Second, any PURP on goods left in inventory at the end of the year is added to the total cost of sales (which then reduces the groups profit by the amount of profit on goods not sold externally).
All of this is explained, with examples, in my free lectures.
The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
Thanks a lot for the clarification, Sir.
I’m really sorry i read the question wrong. My bad.
The PURP deducted is actually 4,000. I miscalculated it as i thought it should be 5,000 by neglecting the fact that 20% goods are sold.
Now it got it right.Thanks again sir.
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