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Hey Mike, I have a little doubt with this question
A 60% owned subsidiary sold goods to its parent for $150,000 at a mark-up of 25% on cost during the year
ended 30 June 20X5. One fifth of these goods remained unsold as at 30 June 20X5.
What is the debit adjustment to be made to group retained earnings to reflect the unrealised profit in
inventory at 30 June 20X5?
A $6,000
B $3,600
C $2,400
D $4,500Answer : $150,000 x 25/125 x 1/5 x 60% = $3,600
The only thing which confuses me is that when should we include the 60% and when not to? In which situation do we take the full pup and in which situations to take the % of the pup? I have went through all the lectures yet i still get confused by this.
Your help is much appreciated! Thanks in advance. 🙂
Hi,
This question is deliberately designed to catch you out. You think that it is asking you for the PURP, which it isn’t. You’ve correctly calculated the PURP, not using the 60%, but the question asks the adjustment to group retained earnings, which is where I think that it is a bit unfair.
We make the PURP adjustment in S’s book, through the net asset working and S’s retained earning, and this then gives us the post-acquisition profits. We then take 60% of these post acquisition profits before charging them to the group retained earnings.
I doubt that you will be the first person to be caught out by this question, so don’t get too worried about it.
Thanks
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