ACCA Applied Knowledge · Financial Accounting · Subsidiaries
Parent P sells goods to its subsidiary S at cost plus 25%. At the year end S holds inventory bought from P at a transfer price of $60,000. What is the provision for unrealised profit (PUP) to be deducted in the consolidation?
The provision is $12,000. A 25% mark-up on cost equals 20% of the selling price (25/125), so the unrealised profit in $60,000 of inventory is $12,000. Using 25% of the transfer price would overstate the provision at $15,000.
- A$15,000
- B$12,000Correct
- C$9,000
- D$7,500
Explanation
Mark-up of 25% on cost means profit is 25/125 = 20% of the selling price. $60,000 x 20% = $12,000. Using $60,000 x 25% = $15,000 wrongly applies the mark-up to the selling price.
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