- 10 Marks
FR – L2 – Q95 – Business Combinations
Question
On 31 December Year 5, an associate, Anita Healthcare Ltd, holds inventory which is valued at GH¢32,000 purchased during the year from its investor Pamela Wellness Ltd. At the same date, Pamela Wellness Ltd holds inventory purchased from a subsidiary, Sophie Pharmaceuticals Ltd, which is valued at GH¢80,000.
Sales from Pamela Wellness Ltd to Anita Healthcare Ltd and from Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd are priced at a mark-up of one-quarter on cost.
Pamela Wellness Ltd owns 30% of Anita Healthcare Ltd and 60% of Sophie Pharmaceuticals Ltd.
Required
Set out the adjustments necessary to reflect any unrealised profit in the above in the consolidated statement of financial position.
Answer
Investment in associate
Reduce by group share of unrealised profit in inventory held by Anita Healthcare Ltd purchased from Pamela Wellness Ltd (GH¢6,400 (W) × 30%) = GH¢1,920.
Consolidated inventory (Pamela Wellness Ltd + Sophie Pharmaceuticals Ltd)
Reduce by unrealised profit in inventory purchased by Pamela Wellness Ltd from Sophie Pharmaceuticals Ltd = GH¢16,000 (W).
Consolidated retained earnings (Pamela Wellness Ltd plus group share of post-acquisition profits of Sophie Pharmaceuticals Ltd + group share of post-acquisition profits of Anita Healthcare Ltd)
Reduce by group share of unrealised profit in inventory sold by:
a) Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd (GH¢16,000 (W) × 60%) = GH¢9,600; and
b) Pamela Wellness Ltd to Anita Healthcare Ltd (GH¢6,400 (W) × 30%) = GH¢1,920.
Non-controlling interests
Reduce by non-controlling interests’ share of unrealised profit in inventory sold by Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd (GH¢16,000 (W) × 40%) = GH¢6,400.
Working
Unrealised profit in inventory
| Held by Pamela Wellness Ltd | Held by Anita Healthcare Ltd | |
|---|---|---|
| Inventory held at year-end | GH¢80,000 | GH¢32,000 |
| Selling price | ||
| Cost | (64,000) | (25,600) |
| Unrealised profit | 16,000 | 6,400 |
- Tags: Associates, Consolidation, Financial Statements, IAS 2, IAS 28, IFRS 3, Inventory, Subsidiaries, Unrealised Profit
- Level: Level 2
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