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

Hold Co owns 75% of Sub Co. During the year Hold Co sold goods to Sub Co for $80,000, at a mark-up of 25% on cost. At the year end, Sub Co still held half of these goods. What is the unrealised profit adjustment to eliminate in the consolidated statement of financial position?

The unrealised profit is $8,000. Half of the $80,000 goods remain, worth $40,000 at transfer price, and with a 25% mark-up on cost the profit is 25/125 of that amount, which is $8,000.

  1. A$8,000Correct
  2. B$16,000
  3. C$6,400
  4. D$10,000

Explanation

Goods still held at transfer price = 40,000. Profit in them = 40,000 x 25/125 = 8,000. Using 25/100 gives 10,000, which wrongly treats the mark-up as a margin on sales. Using the full 80,000 sales gives 16,000, ignoring that half was sold on.

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