Question 1

SECTION A

Parent Co sells goods to its 75% owned subsidiary, Sub Co, at a markup of 25% on cost. During the year, Parent Co sold goods worth $500,000 to Sub Co. At the year-end, Sub Co still held 40% of these goods in its inventory.

What is the provision for unrealized profit (PUP) that must be eliminated in the consolidated financial statements?

Accepted Answer

1. Calculate the value of the goods remaining in inventory (40% of $500,000). 2. Determine the profit element in that remaining inventory. Since it's a 25% mark-up on cost, the profit fraction is 25/125. 3. Multiply the remaining inventory value by the profit fraction.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using 25% as a margin (25/100) instead of a markup (25/125), resulting in $50,000.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 1

More questions from this exam