ExpertHard2 marksMultiple Choice
ACCA · Question 29 · Preparing Simple Consolidated Financial Statements
Section A
ParentCo acquired 60% of SubCo on 1 January 20X1. During the year ended 31 December 20X1, SubCo sold goods to ParentCo for $50,000. SubCo applies a mark-up on cost of 25%. At the year-end, 40% of these goods remained in ParentCo's inventory. What is the provision for unrealized profit (PUP) that must be eliminated in the consolidated financial statements?
Section A
ParentCo acquired 60% of SubCo on 1 January 20X1. During the year ended 31 December 20X1, SubCo sold goods to ParentCo for $50,000. SubCo applies a mark-up on cost of 25%. At the year-end, 40% of these goods remained in ParentCo's inventory. What is the provision for unrealized profit (PUP) that must be eliminated in the consolidated financial statements?
Answer options:
A.
$5,000
B.
$4,000
C.
$2,400
D.
$10,000
How to approach this question
1. Convert mark-up to margin: 25% mark-up = 25/125 margin = 20%. 2. Calculate total profit on the sale: $50,000 * 20% = $10,000. 3. Calculate the unrealized portion (the part still in inventory): $10,000 * 40% = $4,000. Note: Eliminate 100% of the PUP, regardless of the 60% ownership.
Full Answer
B.$4,000✓ Correct
The goods were sold for $50,000. A 25% mark-up on cost means the sales price represents 125% of the cost. The profit is therefore 25/125 (or 20%) of the sales price. Total profit = $50,000 * 20% = $10,000. Since 40% of the goods remain in inventory, the unrealized profit (PUP) is $10,000 * 40% = $4,000. In consolidations, 100% of the PUP is eliminated.
Common mistakes
Applying 25% directly to the sales figure ($50,000 * 25% = $12,500), or multiplying the final PUP by the parent's ownership percentage (60%).
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