Question 1

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?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Applying 25% directly to the sales figure ($50,000 * 25% = $12,500), or multiplying the final PUP by the parent's ownership percentage (60%).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 6

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