ExpertMedium2 marksMultiple Choice
ACCA · Question 28 · Financial Reporting
Section B - Case 3: BioHealth Holdings
During the year ended 31 December 20X8, BioHealth sold medical supplies to MedTech for $800,000. BioHealth applies a mark-up of 25% on cost. At 31 December 20X8, one-quarter (25%) of these goods remained in MedTech's inventory.
What is the Provision for Unrealized Profit (PURP) that must be eliminated in the consolidated financial statements?
Section B - Case 3: BioHealth Holdings
During the year ended 31 December 20X8, BioHealth sold medical supplies to MedTech for $800,000. BioHealth applies a mark-up of 25% on cost. At 31 December 20X8, one-quarter (25%) of these goods remained in MedTech's inventory.
What is the Provision for Unrealized Profit (PURP) that must be eliminated in the consolidated financial statements?
Answer options:
A.
$50,000
B.
$40,000
C.
$160,000
D.
$200,000
How to approach this question
1. Find the selling price of goods remaining in inventory. 2. Calculate the profit element using the mark-up fraction (Mark-up / (100 + Mark-up)).
Full Answer
B.$40,000✓ Correct
Value of intra-group goods remaining in inventory = 25% × $800,000 = $200,000.
The goods were sold at a mark-up of 25% on cost. Therefore, selling price represents 125% of cost.
Unrealized profit (PURP) = $200,000 × (25 / 125) = $40,000.
Common mistakes
Applying 25% directly to the $200,000 (treating mark-up as margin), resulting in $50,000.
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