Sales between Parent and associate

soooraj – how is that helping?

The question relates to sales between a parent and an associate – where did subsidiaries come into it?

Besides which, you’re giving a misleading answer that has now made my job so much more difficult!

Let me first correct soooraj and then I’ll get to itsifeanyi

When there is any dealing between a parent and a subsidiary (and they can and they often (in exams) do trade together), when we consolidate it is as thought he two companies were a single unit. Thus, the concept of an intra-group trade becomes difficult – how can a company trade with itself.

So in the Profit or Loss account, thre intra-group trade is eliminated from both revenue and from cost of sales, dollar for dollar.

Next we should consider whether there is any need for a provision for unrealised profit that has been recognised by the selling group company on the sale but the goods are still in the closing inventory of the buying group company as at the year end.

Calculate the provision for unrealised profit (the pup) and ADD that figure onto the combined cost of sales

In the statements of financial position there could be a balance owed by one group company to another and a balance owed to one group company to another.

On consolidation, when we treat the companies within the group as a single combined unit, we would be showing ourselves owing money to ourselves (and that would be stupid!)

So, having reconciled any differences between the balance on the account receivable from a group company with the balance on the account payable to a group company, we then cancel the receivable against the payable. For the reconciliation exercise, check out the appropriate lecture in the video lectures

Right, that gets the soooraj confusion out of the way.

Now for the itsifeanyi question