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Unrealised profit in associate?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Unrealised profit in associate?

  • This topic has 11 replies, 3 voices, and was last updated 9 years ago by MikeLittle.
Viewing 12 posts - 1 through 12 (of 12 total)
  • Author
    Posts
  • November 24, 2015 at 4:40 pm #284951
    Hatif
    Member
    • Topics: 5
    • Replies: 12
    • ☆

    At 1 November 20X6, Uzielli aquired 75% shares in Oglesby Ltd.

    At 31 July 20X8, Uzielli Sold 35% of its shares in oglesby but maintained significant5 influence over Oglesby.

    On 10 September 20X8, Uzeilli sold inventories to Oglesby at an agreed price of $5 million, at markup of 25% on cost. Oglesby had sold half of these goods to third party by the year end 31 October 20X8 amd had settled all amounts owing to Uzielli.

    How should I treat unrealised profit and inventory?

    November 24, 2015 at 8:29 pm #284995
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    Deduct the entire $500,000 from Oglesby retained earnings at the reporting date

    Then take Uzielli’s share of Oglesby’s post acquisition retained earnings or Oglesby’s profit after tax (depends whether it’s a SoFP question or a SoPorL question)

    November 25, 2015 at 2:39 am #285050
    Hatif
    Member
    • Topics: 5
    • Replies: 12
    • ☆

    Thanks Mike! 😀

    And then I should eliminate the profit of 0.2m (5000000×25/125×1/2×40%) from retained earnings of Uzeilli and working of Associate?

    November 25, 2015 at 5:12 am #285056
    jessiechong
    Member
    • Topics: 2
    • Replies: 17
    • ☆

    Sir, I am confused, should it be Dr RE and CR COS in Uzeilli’s book as Uzeillli is the seller?

    November 25, 2015 at 8:32 am #285111
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    From Oglesby, NOT from Uzielli! This is the exception to the rule about making the adjustment in the records of the seller.

    By making the adjustment in the associate’s records before taking the investors share of profits we automatically eliminate just the group’s share of that unrealized profits

    November 25, 2015 at 8:35 am #285112
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    Jessie, your double entry doesn’t make sense even if the adjustment were to be in Uzielli!

    If this had been Uzielli selling to a subsidiary the pup entry in Uzielli’s records would be Dr Cost of sales (thus increasing cost of sales and reducing profits) and Cr Inventory on the SoFP

    November 25, 2015 at 2:29 pm #285198
    Hatif
    Member
    • Topics: 5
    • Replies: 12
    • ☆

    But in question Beth (12/07), beth sold goods costing $18M to its associate for $28M. At year end inventory was still held by associate.

    In the solution its stated, IAS 28 requires that Beth share of profit should be eliminated. Beth share of profit is $3M (28-18=10×30%)

    Dr Cost of sales/Retained earning (Beth) $3M
    Cr Investment in associate $3M

    November 25, 2015 at 5:06 pm #285258
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    There are two ways of tackling this issue. What I have posted above is the easy way – always make the adjustment in the retained earnings of the associate, no matter whether it’s the associate buying or selling.

    Kaplan and BPP (and the examiner’s answer) make the adjustment in the parent’s retained earnings following an awkward calculation

    My way is easier!

    November 25, 2015 at 7:04 pm #285276
    Hatif
    Member
    • Topics: 5
    • Replies: 12
    • ☆

    Sure it is Mike 🙂
    Thanks a bunch!

    November 25, 2015 at 7:17 pm #285279
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    You’re welcome

    November 27, 2015 at 5:08 am #285614
    jessiechong
    Member
    • Topics: 2
    • Replies: 17
    • ☆

    Thanks for making this so clear Sir.

    November 27, 2015 at 10:25 am #285670
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    You’re very welcome Jessie

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