Skip to content

ACCA Applied Skills · Financial Reporting · The concepts and principles of groups and consolidated financial statements

Hazel owns 40% of Elm, an associate. During the year Hazel sold goods to Elm for $300,000, at a margin of 25% on selling price. At the year end, half of these goods remained in Elm's inventory. What adjustment is made to eliminate unrealised profit in Hazel's consolidated financial statements?

Unrealised profit of $15,000 is eliminated, reducing group profit and the investment in associate. Profit of $75,000 on the sales, half unsold gives $37,500, and Hazel's 40% share is $15,000. Inventory is not adjusted since the associate is equity accounted.

  1. AReduce consolidated profit and the investment in associate by $15,000Correct
  2. BReduce consolidated profit and consolidated inventory by $15,000
  3. CReduce consolidated profit and the investment in associate by $37,500
  4. DReduce consolidated profit and the investment in associate by $6,000

Explanation

Total profit = 300,000 x 25% = 75,000. Half unsold gives unrealised profit of 37,500. Hazel's share is 40% x 37,500 = $15,000, deducted from the group profit and the investment in associate. Inventory is not adjusted because the associate's inventory is not consolidated.

Did you get it right without looking?

One question tells you little. A timed set on The concepts and principles of groups and consolidated financial statements shows your real accuracy, how long you take and where you lose marks.

Practise The concepts and principles of groups and consolidated financial statementsFree diagnostic mock

More The concepts and principles of groups and consolidated financial statements questions