FNST Q- stuck!! :(

AmyRichardson

Helloooo I am preparing for my fnst re sit on thurs and cant seem to work this one out...
any takers?

Claw Plc acquired 90% of the issued share capital of Deer Ltd on 1 April 20X0.

Extracts from their statements of comprehensive income for the year ended 31 March 20X1 are shown below:

Claw Plc Deer Ltd
£000 £000
Continuing operations
Revenue 40,800 18,600
Cost of sales (24,200) (7,300)
Gross profit 16,600 11,300
Other income – dividend from Deer Ltd 1,800 -
Distribution costs & administrative expenses (2,500) (1,600)
Profit before tax 15,900 9,700

Additional data

During the year Deer Ltd sold goods which had cost £100,000 to Claw Plc for £480,000. Half of these goods still remain in inventory at the end of the year


I am not sure how to deal with the PURP on this?

Help please!!

thanku

Steve Collings

Have a look at my article on the consolidated income statement - this covers unrealised profits in inventory. If you still need help after reading this we'll work through it.

Regards
Steve

AmyRichardson

Thank you Steve, I have had a read through and cant seem to work it out still??




it can be so frustrating at times

sdv

AmyRichardson wrote: »

Helloooo I am preparing for my fnst re sit on thurs and cant seem to work this one out...
any takers?

Claw Plc acquired 90% of the issued share capital of Deer Ltd on 1 April 20X0.

Extracts from their statements of comprehensive income for the year ended 31 March 20X1 are shown below:

Claw Plc Deer Ltd
£000 £000
Continuing operations
Revenue 40,800 18,600
Cost of sales (24,200) (7,300)
Gross profit 16,600 11,300
Other income – dividend from Deer Ltd 1,800 -
Distribution costs & administrative expenses (2,500) (1,600)
Profit before tax 15,900 9,700

Additional data

During the year Deer Ltd sold goods which had cost £100,000 to Claw Plc for £480,000. Half of these goods still remain in inventory at the end of the year


I am not sure how to deal with the PURP on this?

Help please!!

thanku

The key to his question is to work out the UNREALISED Profit

sold to parent/subsiduary 480,000
cost to parent/subsiduary 100,000
profit............................. 380,000 Only 50% sold - 50% unsold= UNREALISED PROFIT


Unrealised profit = 380,000 x 50% = 190,000


Workings

sales 40,800 +18,600 - (inter company transfer) 480 = 58,920
cost 24,200 +7300 - 480 .......................................= 31,020

Gross profit ..............................................................27,900


Note there should what ever adjustments you make to sales / purchases/ cost of sales (before adjusting for unrealised profits) the gross will remain the same

now because we have un realised profits of 190,000 - our adjusted GP will go down to 27,900 - 190 = 27,710

Thus

Consolidated IS

sales 40,800 +18,600 - (inter company transfer) 480 = 58,920
cost 24,200 +7300 - 480 + 190................................= 31,210

Gross profit ..............................................................27,710

(note - to reduce profits increase costs by 190)

less dist & admin costs 2500 + 1600 ...........................4,100

Profit before tax .......................................................23,610

Steve Collings

Hi Amy

Apologies for my delay but I have not been able to log on today. However SDV has sufficiently answered your query. The key point to remember (as I have touched on in my article above) is the whole point of group financial statements. They are prepared to show the group as a SINGLE reporting entity. This is the reason IAS 27 (shortly to become IFRS 10) requires elimination of all intra-group trading. Profits on sale of inventory can only be recognised once the goods have been sold to outsiders (i.e. the group's customers).

If you were preparing both the consolidated income statement and consolidated statement of financial position, the double entry would be DR cost of sales (as the original credit containing the unrealised profit would have been to inventory in cost of sales when recognising the pre-adjusted inventory figure) and CR inventory in current assets to reduce the value of inventory in the consolidated financial statements to accord to IAS2 principles i.e. lower of cost and net realisable value.

Hope that helps.

Regards
Steve

AmyRichardson

Thank you both...

I do understand now ! So much easier to understand than the textbook

almost 100% prepared for my exam now, just got ratios to go over next!

Cheers

Amy