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ACCA Applied Skills · Financial Reporting · Preparation of consolidated financial statements for a simple group

Dune Co owns 40% of Echo Co, an associate. During the year Echo sold goods to Dune for $120,000, earning a mark-up of 25% on cost. Half of these goods remain in Dune's inventory at the year end. What amount of unrealised profit should be eliminated from Dune's share of Echo's profit?

The adjustment is $4,800. Inventory still held is $60,000, which contains profit of $60,000 × 25/125 = $12,000. Dune's share of the unrealised profit is 40% of this, so $4,800 is removed from its share of the associate's profit.

  1. A$12,000
  2. B$9,600
  3. C$6,000
  4. D$4,800Correct

Explanation

Goods still held cost Dune $60,000. Profit in them = $60,000 × 25/125 = $12,000. Dune eliminates only its 40% share: $12,000 × 40% = $4,800. $9,600 forgets that only half remains in inventory, $6,000 applies the mark-up to the selling price instead of using 25/125, and $12,000 takes 100% of the profit.

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