ExpertHard2 marksMultiple Choice
ACCA · Question 14 · Preparation of Consolidated Financial Statements
SECTION A
Alpha Co owns 30% of Beta Co and exercises significant influence. During the year, Alpha sold goods to Beta for $100,000, applying a mark-up on cost of 25%. At the year-end, half of these goods remained in Beta's inventory.
What is the required adjustment for the Provision for Unrealized Profit (PURP) in Alpha's consolidated financial statements?
SECTION A
Alpha Co owns 30% of Beta Co and exercises significant influence. During the year, Alpha sold goods to Beta for $100,000, applying a mark-up on cost of 25%. At the year-end, half of these goods remained in Beta's inventory.
What is the required adjustment for the Provision for Unrealized Profit (PURP) in Alpha's consolidated financial statements?
Answer options:
A.
$10,000
B.
$6,000
C.
$3,000
D.
$3,750
How to approach this question
1. Calculate total profit on the sale (use mark-up fraction: 25/125). 2. Determine how much profit is in the unsold inventory. 3. Multiply by the parent's ownership percentage in the associate.
Full Answer
C.$3,000✓ Correct
1. Calculate total profit: Selling price $100,000. Mark-up is 25%, so cost is 100% and sales is 125%. Profit = $100,000 * (25/125) = $20,000.
2. Profit in closing inventory: Half remains, so $20,000 * 50% = $10,000.
3. Associate adjustment: Alpha only eliminates its share of the unrealized profit: $10,000 * 30% = $3,000. The entry is Dr Share of profit of associate, Cr Investment in associate.
Common mistakes
Treating mark-up as margin (multiplying by 25% instead of 25/125), or forgetting to multiply by the 30% ownership share.
Practice the full ACCA FR — Financial Reporting Practice Exam 3
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