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Ruby Co owns 30% of emerald co. Emerald co sold goods to ruby for 160,000. It applies one third of mark-up on cost. Ruby still have 25% of these goods in inventory at the year end.
What amount should be deducted from consolidated retained earning ?
My question – they have divideded 160,000 by 4? I dont understand why so ?
The division by four is the mark up. The profit is 1/3 of the costs of selling the goods. The revenue will therefore by 1 and 1/3 of the costs, i.e. cost plus 1/3 of the costs.
to work out the profit from the sales revenue then we will take 1/3 of the 1 and 1/3, which works out as 1/4. Try it and you’ll see that it works.