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(iii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the recorded
activities for the year ended 31 March 2012 and balances as at 31 March 2012:
Pyramid Square
$000 $000
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700
On 26 March 2012, Pyramid sold and despatched goods to Square, which Square did
not record until they were received on 2 April 2012. Square’s inventory was counted
on 31 March 2012 and does not include any goods purchased from Pyramid.
On 27 March 2012, Square remitted to Pyramid a cash payment which was not
received by Pyramid until 4 April 2012. This payment accounted for the remaining
difference on the current accounts.
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Here i can understand that 1500 is Goods in transit.
but i am struggling through cash in transit. how to know that sir?Amit you say “Here i can understand that 1500 is Goods in transit.
but i am struggling through cash in transit. how to know that sir?”The question actually tells you that there is cash-in-transit, but how much is it?
According to Pyramid the account with Square looks like this:
4,400 receivable and that’s after having recorded the despatch of the goods just before the year end but it doesn’t include the cash sent by Square just before the year end
According to Square, they have a payable to Pyramid of 1,700 but that’s after recording the payment to Pyramid just before the year end and it doesn’t include the goods still in transit from Pyramid.
The rule with reference to in-transit items is “accelerate the cash / goods into the records of the receiving company. In this case, we’re going to accelerate the goods into Square and we’re going to accelerate the cash into Pyramid.
Let’s deal with the goods first.
When Square receives these goods, their liability to Pyramid will increase by 1,500 giving us a balance owed to Pyramid of 3,200 (1,700 per question + 1,500 goods in transit)
Now we know that that is the correct intra-group balance because there are no more adjustments to go into Square’s records.
But Pyramid shows 4,400 receivable from Square and it should be 3,200 (as above)
Therefore there must be 1,200 cash in transit which, when received by Pyramid, will reduce the receivable in Pyramid’s records
Haven’t I recorded my solution to this question in the F7 revision notes on this site?
Post again if it’s still not clear
Vishal, this was a question directed to me – it’s in the Ask the Tutor forum
Please hold your enthusiasm in check 🙂
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