Financial Accounting · Associates

Unrealised Profit on Intragroup Trading with Associates

Updated 11 October 2026 · Fact-checked

When the parent and an associate trade and some goods are still in inventory at the year end, you remove only the group's share of the profit on those goods. Work out the profit in closing inventory, multiply by the ownership percentage, then deduct it from profit and from inventory or the investment.

Understand Unrealised Profit on Intragroup Trading with Associates

An associate is not part of the group in the way a subsidiary is. The investor does not add the associate's assets and liabilities line by line. It uses the equity method: one line in profit or loss for its share of the associate's profit, and one line in the statement of financial position for the investment in the associate.

Profit on goods sold between the two companies is only really earned when the goods are sold outside the group. If the goods are still in inventory at the year end, part of that profit is unrealised. You must remove it so the group does not overstate profit and assets.

With a subsidiary you remove 100% of the unrealised profit, because the group controls the whole subsidiary. With an associate the group only has an interest in its percentage share of the associate's results. So you eliminate only the group's share of the unrealised profit. For a 30% associate, you remove 30% of the profit in closing inventory.

The direction of the sale decides where the adjustment goes. If the parent sells to the associate, the inventory sits in the associate's books, so the credit reduces the investment in associate. If the associate sells to the parent, the inventory sits in the group's own inventory, so the credit reduces group inventory.

The sales and purchases themselves are not cancelled out of group revenue and cost of sales. The associate is not consolidated, so those figures are never combined. Balances owed to or by the associate are also not cancelled. They stay as receivables or payables, and are shown separately if the question asks.

Key formulas to remember

Profit in closing inventory (mark-up on cost): Unrealised profit = inventory at transfer price × mark-up ÷ (100 + mark-up); Example: 25% mark-up means profit is 25/125 = 1/5 of the transfer price.
Profit in closing inventory (margin on selling price): Unrealised profit = inventory at transfer price × margin %; Example: a 20% margin means profit is 20% of the transfer price.
Group share of unrealised profit (PUP): PUP = unrealised profit in inventory × group's % holding in the associate; Never 100%. Use only the percentage the investor owns.
Parent sells to associate: Dr Group retained earnings (or parent's profit) ; Cr Investment in associate; The inventory is held by the associate, so the investment is reduced.
Associate sells to parent: Dr Share of profit of associate (or retained earnings) ; Cr Group inventory; The inventory is held by the group, so inventory is reduced.
Associate balances: Receivables and payables with the associate are not cancelled; Show them as normal balances. Do not offset them against each other.

How to solve Unrealised Profit on Intragroup Trading with Associates questions

Use this method for any question on trading between the investor and an associate.

1Find the percentage holding of the investor in the associate. Check it is an associate (significant influence, usually 20% to 50%).
2Identify who sold to whom. Parent to associate, or associate to parent.
3Find the goods still in inventory at the year end, valued at the transfer price.
4Convert the transfer price into profit. Use mark-up ÷ (100 + mark-up) for mark-up on cost, or the margin % for margin on sales.
5Multiply that profit by the group's percentage holding to get the PUP.
6Post the entry. If the parent sold, reduce parent profit or retained earnings and the investment in associate. If the associate sold, reduce the share of associate profit and group inventory.
7Leave intragroup sales, purchases and balances uncancelled. Check your final figures against the question's requirement.

Quickest way: Three-question shortcut

When to use it: Use this for number-entry and multiple-choice questions where you only need the PUP or the final figure.

Ask: how much profit is in the unsold goods? Use the fraction (1/5 for 25% mark-up, 1/4 for 33⅓% mark-up, or the margin % directly).
Ask: what is the group's share? Multiply by the holding, for example 30% or 40%.
Ask: who sold? Parent sold means reduce the investment in associate. Associate sold means reduce group inventory and the share of associate profit.
Write the PUP once and use the same figure in both places.

Common mistakes in Unrealised Profit on Intragroup Trading with Associates

Eliminating 100% of the unrealised profit instead of the group share.
Students copy the subsidiary rule from intragroup trading.
Fix: For an associate always multiply by the holding percentage. Write the percentage next to your working.
Using the mark-up as if it were a margin, such as taking 25% of the transfer price.
The words mark-up and margin are mixed up under time pressure.
Fix: Mark-up is on cost, so use mark-up ÷ (100 + mark-up). Margin is on selling price, so multiply by the margin %.
Taking the PUP off group inventory when the parent sold to the associate.
Students automatically link unrealised profit with inventory in the consolidated statement.
Fix: The goods are in the associate's books, which are not consolidated. Credit the investment in associate instead.
Cancelling sales, purchases and receivables or payables with the associate.
Students treat the associate like a subsidiary.
Fix: The associate is not consolidated line by line. Leave these items as they are, unless the question says otherwise.
Applying the percentage to total sales instead of closing inventory only.
Students focus on the total traded and forget that only unsold goods carry unrealised profit.
Fix: Use only the inventory still held at the year end. Goods already sold outside the group have realised their profit.

Worked examples

Example 1

Parent P owns 30% of associate A. During the year P sold goods to A for $200,000 at cost plus 25%. At the year end A still held goods that cost A $50,000 (transfer price). What is the adjustment, and where is it posted?

Show the solution

P sold to A, so the inventory is in A's books.
Profit in closing inventory = $50,000 × 25 ÷ 125 = $10,000.
Group share = $10,000 × 30% = $3,000.
Entry: Dr Group retained earnings $3,000; Cr Investment in associate $3,000.
The $200,000 sales and the matching cost of sales stay in P's own figures. They are not cancelled.

Answer: PUP = $3,000. Reduce group retained earnings and the investment in associate by $3,000.

Example 2

Parent P owns 40% of associate A. A sold goods to P during the year for $90,000, earning a 20% margin on selling price. At the year end P held $30,000 of these goods (at transfer price). A's profit after tax is $150,000. Find the share of profit of associate shown in group profit or loss, and the effect on group inventory.

Show the solution

A sold to P, so the inventory is in the group's own books.
Profit in closing inventory = $30,000 × 20% = $6,000.
Group share = $6,000 × 40% = $2,400.
Share of A's profit = $150,000 × 40% = $60,000.
Share of profit after PUP = $60,000 − $2,400 = $57,600.
Group inventory is reduced by $2,400. Entry: Dr Share of profit of associate $2,400; Cr Group inventory $2,400.

Answer: Share of profit of associate = $57,600. Group inventory is reduced by $2,400.

Exam tips

Read the first line for the holding percentage and the direction of the sale before doing any calculation.
Check whether the question gives a mark-up or a margin. Write the fraction next to your working, such as 25/125.
In multiple-choice questions, wrong options often come from using 100% instead of the group share or from mixing up mark-up and margin. Compute the right figure before looking at the options.
For multiple-response questions, remember that associate balances are not cancelled and associate sales are not removed from revenue. These are common wrong statements.
In number-entry questions, enter only the number and follow the units asked for. Keep the sign in mind: PUP always reduces profit and either inventory or the investment.

Practice questions from Associates

Unrealised Profit on Intragroup Trading with Associates in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Unrealised Profit on Intragroup Trading with Associates: frequently asked questions

Why is unrealised profit on associate trading not eliminated in full?

The group does not control an associate, so it only owns its percentage share of the associate's results. Only that share of the profit is unrealised from the group's viewpoint. Eliminating more would remove profit the group never recognised.

What is PUP in an associate question?

PUP means provision for unrealised profit. It is the group's share of the profit sitting in inventory that has not yet been sold outside the group. You deduct it from profit and from inventory or the investment.

Do I reduce inventory or the investment in associate?

It depends on who sold. If the parent sold to the associate, the associate holds the goods, so reduce the investment in associate. If the associate sold to the parent, the group holds the goods, so reduce group inventory.

Do I cancel receivables and payables with an associate?

No. The associate is not consolidated line by line, so these balances stay as normal receivables or payables. You may need to disclose them separately if the question asks.