ExpertMedium1 markMultiple Choice
ACCA · Question 44 · Preparing simple consolidated financial statements
Scenario: TechNova PLC acquired 80% of CyberNetix Ltd on 1 Jan 20X5 for $500,000 cash. At acquisition, CyberNetix's retained earnings were $200,000 and share capital was $100,000. NCI fair value at acquisition was $120,000. During 20X5, TechNova sold goods to CyberNetix for $80,000 (25% mark-up on cost). Half remained in inventory at year-end (31 Dec 20X5). CyberNetix's 20X5 profit was $150,000.
Which entity's retained earnings must be reduced by the Provision for Unrealized Profit (PUP)?
Scenario: TechNova PLC acquired 80% of CyberNetix Ltd on 1 Jan 20X5 for $500,000 cash. At acquisition, CyberNetix's retained earnings were $200,000 and share capital was $100,000. NCI fair value at acquisition was $120,000. During 20X5, TechNova sold goods to CyberNetix for $80,000 (25% mark-up on cost). Half remained in inventory at year-end (31 Dec 20X5). CyberNetix's 20X5 profit was $150,000.
Which entity's retained earnings must be reduced by the Provision for Unrealized Profit (PUP)?
Answer options:
A.
TechNova PLC (the parent)
B.
CyberNetix Ltd (the subsidiary)
C.
Both entities equally
D.
The Non-Controlling Interest
How to approach this question
Identify who the seller is. The seller recorded the profit, so the seller's retained earnings must be adjusted.
Full Answer
A.TechNova PLC (the parent)✓ Correct
Because TechNova (the parent) sold the goods to CyberNetix, TechNova recorded the profit. Therefore, the PUP adjustment ($8,000) is deducted from the parent's retained earnings. It does not affect the subsidiary's profit or the NCI.
Common mistakes
Deducting the PUP from the subsidiary's profit, which would incorrectly reduce the NCI.
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