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ACCA Applied Knowledge · Financial Accounting · Subsidiaries

Tarn Co owns 60% of Wick Co. During the year Tarn sold goods to Wick for $90,000 at a mark-up of 25% on cost. At the year end, one third of these goods remain in Wick's inventory. What is the adjustment to consolidated retained earnings in respect of the unrealised profit, assuming the parent was the seller and the NCI is unaffected?

Consolidated retained earnings are reduced by $6,000. A 25% mark-up on cost means profit is 20% of the $90,000 selling price, or $18,000. One third remains in inventory, so $6,000 is unrealised. As the parent sold the goods, the whole amount is deducted from group reserves.

  1. AReduce by $6,000Correct
  2. BReduce by $18,000
  3. CReduce by $3,600
  4. DReduce by $5,000

Explanation

Selling price 90,000; profit is 25/125 = 20% of selling price = 18,000. One third unsold gives unrealised profit of 6,000. Parent is the seller, so the whole 6,000 is deducted from group retained earnings. Reducing by $18,000 ignores that only one third remains; $3,600 wrongly applies the 60% ownership share.

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