ACCA Applied Knowledge · Financial Accounting · Associates
Gamma owns 25% of Delta, an associate. During the year Gamma sold goods to Delta for $200,000 at a mark-up of 25% on cost. At the year end, 40% of these goods remained in Delta's inventory. What is the unrealised profit adjustment that reduces Gamma's group profit (and the investment in associate)?
The adjustment is $4,000. The profit on the sale is $40,000 (25/125 of $200,000), of which 40% or $16,000 is unrealised in inventory. Only the investor's 25% share is eliminated for an associate, giving $4,000, deducted from group profit and the investment.
- A$4,000Correct
- B$16,000
- C$3,200
- D$8,000
Explanation
Profit on sale = 200,000 x 25/125 = $40,000. Profit in remaining inventory = 40% x 40,000 = $16,000. Only the group's 25% share is eliminated: $16,000 x 25% = $4,000. The $16,000 figure ignores the ownership percentage.
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