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First Question
I’ve seen that the accounting entries to eliminate unrealized profit (associate sells goods to parent/investor) are as follows:
DR Share of profit from associate
CR Inventory
(As in Kaplan Study Text)and
DR Cost of Sales
CR Inventory
(As in BPP Study Text)I am confused. Which treatment is correct?
Second Question
When a parent/investor sells goods to an associate, the accounting entries are as follows:
DR Cost of Sales
CR Investment in associateWhy do we credit “Investment in associate”?
If you were to read, nderstand and follow the free course notes, I believe that I would not now be answering this question! 🙁
As in life (the are many ways to skin a cat) so in accounting. Clearly you accept the necessity of eliminating the group’s share of any unrealised profit arising from a transaction between a group company and an associate. But how to do it?
My method which I believe is the simplest is as follows:
Calculate the full unrealised profit and deduct that full amount from the associate’s results.
Then when we calculate the group’s share of the associate’s results, we are automatically eliminating the group’s share of that unrealised profit
Following that method results in figures that are slightly different than those published in official answers but I’m pretty sure that the method is acceptable
Incidentally, the Kaplan method debit entry has the same effect as following my method
As for your second question, I have no idea what that entry is trying to achieve. Where a parent / investor sells goods to an associate, surely the entry is Dr receivables, Cr revenue
I cannot explain the entry you have quoted – sorry
Dear Teacher Mike 🙂 It is Elizabeth again.
I have a problem with the unrealised profit question. And it is exactly same as the Oscar’s question 2. In order to prevent to open a new post so I posted here to ask teacher.
I think Oscar meant when we have Unrealised Profit – Downstream transaction,
Why we need to credit the investment in associate as the follow double entry for downstream transaction?
DR Cost of Sales
CR Investment in associate* it was extracted from BPP pg324, section 4.6.
Wishing teacher Mike has a nice day.
Regards
ElizabethHello Elizabeth again!
Surely my response to Oscar is still valid and still answers your question.
The elimination of the pup in the associate’s statement of profit or loss has the effect of reducing the parent’s share because the profit figure is reduced.
That’s the same effect as crediting Investment in Associate with the group’s share of the pup
Dr Cost of sales (reduces profits)
Cr Investment in AssociateMy way, as explained in my answer to Oscar, reduces profit by putting the adjustment through the Associates statement of profit or loss
In my working W5A Investment in Associate I calculate this as Cost of investment + share of post-acquisition profit – any impairment.
That figure for “share of post-acquisition profit” is of course our percentage share of the associate’s profits which we have just adjusted by the amount of the pup
Can you not see that my way has achieved EXACTLY what the BPP method achieves?
dear sir,
When accounting for the unrealised profit with associates,
My understanding is that on the consolidated statement of financial position for the parent: on the asset side, corresponding to the lower RE can only be a lower inventory or investment in associate.
1) upstream sales means parent inventory is overstated, so need to reduce inventory.
2) downstream sales: parent does not consolidate associate’s inventory, so parent can only reduce investment in associate to maintain the balance on the balance sheet.Am I correct to interpret the unrealized profit situation in the above two ways?
Thank you very much in advance!
Regards
Lm
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