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

Parent Co owns 80% of Sub Co, acquired several years ago. During the year Parent Co sold goods to Sub Co for $120,000, making a profit of 25% on selling price. At the year end, one third of these goods remain in Sub Co's inventory. Parent Co's revenue is $900,000 and Sub Co's revenue is $500,000. What is consolidated revenue, and what adjustment is made to cost of sales for unrealised profit?

Consolidated revenue is $1,280,000 because the $120,000 of intra-group sales is eliminated from the combined total. Unrealised profit is only on the one third still in inventory: $120,000 x 1/3 x 25% = $10,000, which is added to consolidated cost of sales.

  1. ARevenue $1,280,000; increase cost of sales by $10,000Correct
  2. BRevenue $1,280,000; increase cost of sales by $30,000
  3. CRevenue $1,400,000; increase cost of sales by $10,000
  4. DRevenue $1,400,000; increase cost of sales by $30,000

Explanation

Consolidated revenue excludes intra-group sales: 900,000 + 500,000 - 120,000 = 1,280,000. Unrealised profit on goods still held = 120,000 x 1/3 x 25% = 10,000, which increases cost of sales (the selling entity is the parent, so the whole adjustment is simply made in consolidated cost of sales). Option B uses the full profit on all goods (120,000 x 25% = 30,000), ignoring that only one third remains in inventory.

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