ACCA FA · Chapter 13 · Question 6 of 12
P sold goods to its subsidiary S for $60,000, at a mark-up of 25% on cost. At the year end, S still held 40% of these goods in inventory. What is the provision for unrealised profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $4,800
Explanation
Profit on the sale = $60,000 x 25/125 = $12,000. Unrealised profit on goods still held = 40% x $12,000 = $4,800, which is deducted from group inventory and from P's retained earnings (P is the seller). Treating 25% as a margin gives $60,000 x 25% x 40% = $6,000.
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