Bamber Assignment DFS

jewels.p

Anyone done this Assignment recently. I cant get my S.O.F.P to balance its out by £53,000

If the parent sold goods to the sub and 25% still remained in the Inventory at the SOFP date do I deduct this figure from the Inventory figure of the Consolidated SOFP? (this wont make it balance but not sure about this either)

Thanks

sammyd22

jewels.p wrote: »

Anyone done this Assignment recently. I cant get my S.O.F.P to balance its out by £53,000

If the parent sold goods to the sub and 25% still remained in the Inventory at the SOFP date do I deduct this figure from the Inventory figure of the Consolidated SOFP? (this wont make it balance but not sure about this either)

Thanks

As the Subsidary hasnt sold the stock sold to them by the Parent, its Unrealised profit so should be deducted i think.

Profit becomes realised once its an outside sale.

Its been a while though.

jewels.p

sammyd22 wrote: »

As the Subsidary hasnt sold the stock sold to them by the Parent, its Unrealised profit so should be deducted i think.

Profit becomes realised once its an outside sale.

Its been a while though.

Yeah thats what I thought so I deducted it. Oh well still £53,000 out then!

Thanks Steven

sammyd22

jewels.p wrote: »

Yeah thats what I thought so I deducted it. Oh well still £53,000 out then!

Thanks Steven

You can Email me your question to sd.kc@hotmail.com and ill take a look if you like.

Thanks

Steve Collings

The reason your SoFP is not balancing is because I suspect you have only done one side of the journal entry required to reduce inventory back to cost to the group in accordance with IAS 2 provisions.

Let's go back to basics.

Suppose P sells goods to S which cost P £10 (assume P owns 100% of S) for £15. S has sold 3/4 of those goods for £20 by the year end. P would have recorded a profit on sale to S of £5. S will have recorded a profit of (£20 - (3/4 x £15) = £8.75. Therefore in each individual financial statements P will show a profit of £5 whilst S will show a profit of £8.75 resulting in a combined profit of £13.75. This is fine for 'individual' financial statement purposes, but not for group purposes because IAS 27 stipulates we remove the effect of all intra-group trading.

From a group perspective, these goods cost the 'group' £10. 3/4 of the goods have been sold by the reporting date so these are 'realised' sales. Therefore the cost of goods sold outside the group is 3/4 x £10 = £7.50. As these goods were sold by S the group realised profit is £20 - £7.50 = £12.50. This figure is £1.25 less than the combined profit of £13.75 which also represents 1/4 of the profit P earned in the sale to S i.e. (1/4 x (£15 - £10)) = £1.25. We can prove this £1.25 difference as it is because 1/4 of the goods sold by P to S are still in S's inventory. What we have to do is now eliminate this 'unrealised' profit because if we did not, inventory would be overstated by £1.25.

The journals required to eliminate this intra-group profit in the consolidated SoFPis:

DR retained earnings in P and
CR inventory in S

We DR retained earnings because of the effect the sale has had in P's books. Remember what retained earnings are - they are retained profits (i.e. retained sales minus expenses). I suspect it is the DR which you have not applied.

I hope that helps you.

Regards
Steve

jewels.p

Hi Steve,

Thanks for the reply but I really dont understand this at all. In the question it says:

B sells goods to R which cost £100,000 for £160,000 during the year. At the SOFP date 25% of the goods remain in R's Inventory.

It doesnt tell me how much the goods were sold for by R so how do I calculate the group realised profit?

This is totally baffling me!

B only owns 80% of R does this get included somewhere?

Thanks again

Steve Collings

Hi Jewels,

Here we have goods sold for 160,000 that cost 100,000 so the profit on the sale from parent to subsidiary is 60,000. However, only 25% of the goods remain in inventory at the year end, so 25% of the profit from parent to subsidiary is still in subsidiary's inventory so this needs eliminating to write it down to cost for group purposes as follows:

60,000 x 25/100 = 15,000

We therefore:

CR inventory in subsidiary (15,000)
DR retained earnings in parent 15,000

Hope that helps.

Regards
Steve

jewels.p

I had it worked out as £15,000 from your earlier reply but thought from your example that I needed to know how much the Sub had sold it for. I just hope you're right and all this will click eventually :001_unsure:

Thanks again for your help Steve!

jewels.p

Had some free time at work so finally got my SOFP to balance woo hoo! It took me long enough. It feels so good when something balances (sad I know) :laugh:

P.S I had also missed off the tax liability Steve (oops)

Rinske

I just did this one as well, and I am going completely blank on b. In which circumstances the accounts of a subsidiary company need not to be consolidated into the group accounts.

I know it is a stupid question, but I just can't think of the answer today. I filled in that if it has been dormant for the time being, but quite sure that's not what I am looking for!

Can anyone enlighten me what obvious answer I am missing here?

Steve Collings

Hi Rinske,

IAS 27 used to contain various exemptions that were subsequently withdrawn during the IASB's 'improvements project' - I think this is the Q you are asking? IAS 27 was revised during this project and the IASB confirmed 4 criteria, all of which must be met to allow a parent the exemption from consolidation. The 4 criteria are:

1. The parent is a wholly-owned sub or partially-owned sub of another entity and its shareholders (voting and non-voting) have been informed about and do not object to the parent not preparing consolidated financial statements.

2. Parent's debt/equity instruments are not publicly traded (ie they are not on a stock exchange).

3. Parent has not file, or intends to file, its financial statements with a securities commission/other regulatory organisation to issue any of its instruments in a public market.

4. The ultimate/intermediate parent produces consolidated financial statements which are available for public use and comply with IFRS.

Hope that helps.

Regards,

Steve

Rinske

Thanks Steve!

I think I just needed a break and get away from my study for a bit.

I had the consolidated accounts with no problems (I think) and then I couldn't think of the excemptions.

So I just took a short break and started on my first practice exam question only to confuse my accruals with prepayments when I tried (I like doing one question at the time for now). Not good!

So bit of a break and back to the study soon, but probably not today.