Page 320 - F3 -FA Integrated Workbook STUDENT 2018-19

Chapter 21

3.5 Other adjustments – provision for unrealised profits (PURP)

If a parent and subsidiary trade with each other (‘intra-group trading’) and some of
the inventory sold remains within the group at the reporting date, we must adjust
closing inventory so that it is stated at original cost to the group.

The PURP is calculated using either the mark-up or margin method.

Mark-up (cost plus) Margin

Profit is based on cost and Profit is based on selling price
calculated by taking the selling and calculated by taking the
price of closing inventory divided profit % of selling price of closing

by (100 + profit %) and multiplied inventory e.g. Intra-group sales
by the profit % e.g. Intra-group of $12,000, all remained in
sales of $12,000, all remained in inventory at the year end and
inventory at the year end and were sold at a margin of 20% =

were sold at a mark-up of 20% =
$12,000 × 20% = PURP of
$12,000 × 20/120 = $2,000. $2,400.

The adjustment:

 Decrease inventory on group SOFP.

 Decrease group retained earnings (W5) if the parent made sale or

 Decrease net assets at the reporting date (W2) if the subsidiary made sale

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