ExpertMedium2 marksMultiple Choice
ACCA · Question 13 · Consolidated Financial Statements
SECTION A
Parent Co sells goods to its 75% owned subsidiary, Sub Co, at a markup of 25% on cost. During the year, Parent Co sold goods worth $500,000 to Sub Co. At the year-end, Sub Co still held 40% of these goods in its inventory.
What is the provision for unrealized profit (PUP) that must be eliminated in the consolidated financial statements?
SECTION A
Parent Co sells goods to its 75% owned subsidiary, Sub Co, at a markup of 25% on cost. During the year, Parent Co sold goods worth $500,000 to Sub Co. At the year-end, Sub Co still held 40% of these goods in its inventory.
What is the provision for unrealized profit (PUP) that must be eliminated in the consolidated financial statements?
Answer options:
A.
$50,000
B.
$40,000
C.
$30,000
D.
$100,000
How to approach this question
1. Calculate the value of the goods remaining in inventory (40% of $500,000). 2. Determine the profit element in that remaining inventory. Since it's a 25% mark-up on cost, the profit fraction is 25/125. 3. Multiply the remaining inventory value by the profit fraction.
Full Answer
B.$40,000✓ Correct
The goods remaining in Sub Co's inventory are valued at $200,000 ($500,000 * 40%). Because Parent Co sold them at a 25% markup on cost, the sales price represents 125% of the cost. The unrealized profit is therefore $200,000 * (25 / 125) = $40,000. This entire amount is eliminated from consolidated inventory and consolidated retained earnings.
Common mistakes
Using 25% as a margin (25/100) instead of a markup (25/125), resulting in $50,000.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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