ACCA Applied Knowledge · Financial Accounting · Associates
Alpha Co owns 30% of Beta Co, an associate. During the year Alpha sold goods to Beta for $200,000 at a mark-up of 25% on cost. At the year end Beta still held half of these goods. What is the unrealised profit that must be eliminated in Alpha's consolidated financial statements?
The adjustment is $6,000. Profit on the sale is $40,000 (25/125 of $200,000), half is still in inventory giving $20,000, and only the investor's 30% share is eliminated for an associate, so $6,000.
- A$6,000Correct
- B$8,000
- C$12,000
- D$20,000
Explanation
Profit in sales = 200,000 x 25/125 = 40,000. Half remains in inventory = 20,000 unrealised profit. Alpha's share is 30% x 20,000 = 6,000. $12,000 wrongly uses a 60% share and $20,000 eliminates 100% of the profit, which is the subsidiary approach.
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