Sub Ltd, 80% owned by Parent plc, sold goods to Parent for £60,000 at a profit margin of 25% on selling price. Half of these goods remain in Parent's inventory at the year end. By how much are the group retained earnings attributable to the parent's shareholders (after the 20% non-controlling share) reduced by the unrealised profit?

Answer and explanation

Correct answer: B. £6,000

  1. Step 1: Goods still held = 50% × £60,000 = £30,000; unrealised profit = 25% × £30,000 = £7,500.
  2. Step 2: The seller is the subsidiary, so the PURP is shared between the group and the NCI in proportion to ownership.
  3. Step 3: Group share = 80% × £7,500 = £6,000 (the NCI bears the other £1,500).
Answer
£6,000.
Why not the others: £7,500: This deducts all the unrealised profit from group retained earnings, but part of it belongs to the non-controlling interest, since the seller is the subsidiary. £12,000: This eliminates the profit on all the goods, though only half remain in inventory. £4,800: This treats the 25% margin as a mark-up on cost instead of as a margin on selling price.

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