ACCA Applied Knowledge · Financial Accounting · Subsidiaries
Parent owns 60% of Sub. During the year Parent sold goods to Sub for $90,000 at a mark-up of 25% on cost. At the year end, one third of these goods remain in Sub's inventory. What is the adjustment to consolidated inventory for unrealised profit?
The unrealised profit is $6,000. Profit on the $90,000 sale is 25/125, or $18,000, and one third of the goods remain in inventory. The full amount is removed from consolidated inventory; the mark-up must be calculated on cost, not on selling price.
- A$4,500
- B$6,000Correct
- C$7,500
- D$18,000
Explanation
Sales price is 125% of cost, so profit = 25/125 x 90,000 = 18,000. One third remains unsold: 18,000 x 1/3 = 6,000. The adjustment is the full amount, not 60%. Using 25% of selling price gives a different figure of 7,500.
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