Hi,
I've got a doubt about a solution in one question:
Python obtained 30% of the equity shares of cobra on 1 June 20x8 for $700,000. lt is able to exercise significant influence over Cobra. During the year to 31 May 20x9 Cobra made sales of $200,000 to Python, priced at cost plus 25% mark-up. Python still had 50% of these goods in inventory at the year end. Cobra's statement of profit or loss for the year ended 31 May 20X9 shows profit for the year of $650,000. What amount should be shown as investment in associate in the consolidated statement of financial position of Python as at 31 May 20x9?
A $895.000
B $875.000
C $835,000
D $870,000
The answer is:
A.
Cost of investment 700,000
share of post-acquisition retained earnings
(650,000 x 30%) 195,000
895,000
Note. The unrealised profit will be credited to group inventory, not investment in associate.
Why we don't adjust retained earnings for unrealised profit from 50% of inventory that is still in possession of Python?
Shouldn't we decrease RE of Cobra by 20,000 (200,000x25/125x50%), therefore decreasing share of post acquisition retained earnings to 189,000?
Cheers