Question 1

Section B - Case 1: Group Consolidations

**Scenario: Nebula Aerospace**
On 1 January 20X5, Nebula Aerospace acquired 80% of the equity share capital of Comet Components. The purchase consideration was $500,000 cash. At the date of acquisition, Comet's share capital was $100,000 and its retained earnings were $250,000. The fair value of the non-controlling interest (NCI) at acquisition was $110,000. 
During the year ended 31 December 20X5, Comet made a profit of $80,000. Nebula sold goods to Comet for $50,000 at a 25% mark-up on cost. Half of these goods remain in Comet's inventory at year-end. Comet owes Nebula $20,000 at year-end.

Which entity's retained earnings must be reduced by the Provision for Unrealized Profit (PUP)?

Accepted Answer

Identify the seller in the intra-group transaction. The seller is the one who recorded the profit, so their retained earnings must be adjusted.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Deducting the PUP from the subsidiary's retained earnings, which would incorrectly reduce the NCI.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 5

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