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Dear SIr,
I am self-studying using Kaplan and BPP study texts. When it came to trading with associates, I was confused because I felt those two study text suggest two different accounting treatments regarding the trading with associates..I will summarize all the adjustments that will go to CSOFP and CSOPL when a parent sells goods to an associate and vice versa. All I need is to get them confirmed.
1)The parent company sells goods to an associate and let’s say group’s share of URP is $1000,
In CSOPL, we need to add this to cost of sales..Group share of profits from associate figure will not get affected here. In CSOFP we need to deduct this from Group Retained earnings and from Investment in associates.
2) The associate company sells goods to Parent and lets say group’s share of URP is $1000,
In CSOPL we need to deduct this from Share of Profit of Associates.In CSOFP we need to deduct this from Group retained earnings and from Group INVENTORY..
Sir, this is what I understood when I was referring Kaplan Study text.
I just went through BPP study text and they have provided an example where Parent sells goods to an associate.
They have provided following JE.
Dr. Group’s share of profit of associates XXX (In Kaplan, Debit entry goes to Cost of sales. I know the impact is same but need to know the correct treatment.)
Cr. Investment In associates. XXXAnd what noteworthy is they have mentioned that when an associates sells goods to parent journal entries are EXACTLY THE SAME.. this is completely different to the entry given by Kaplan.. In this case, according to kaplan we need to deduct URP from RE and GROUP INVENTORY.. But BPP says it’s exactly the same..
Please correct me if I am wrong and If both methods are acceptable suggest me which method examiner prefers.
Thank you in Advance.
Now …
… this is where it’s going to get really interesting!
If you were to read the free course notes on this site you will see that I ALWAYS deduct the FULL pup from the Associate’s profits for the year
Then when I am computing the share of Associate profits for the sake of adding them to group retained earnings I am only going to take my (say) 30% of a reduced profits …
… and thus I automatically eliminate the GROUP’S share of the pup that arose on a transaction with an Associate
I’m not sure that there is only ONE correct way of dealing with the problem
I know for sure that my way is easier and quicker and does not require the sort of mental agility necessary for the two methods
The only downside with my method is, when we have a down-stream transaction (parent to associate) the retained earnings figure comes out different from the printed solution
But I doubt very much that that will be penalised!
OK
Try my way and see how much easier it is!
according to your method, there is no impact on GROUP INVENTORY under any circumstance. Isn’t it?
What you are doing is, you calculate URP and deduct it from associate’s PAT figure. Then you get the group’s share of profit of associate by applying relevant %. Then you add this CSOPL as the share of profit of associate, Group Retained Earnings in workings and Investment in associate figure in CSOFP..
Am I correct?
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