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CA Final · Financial Reporting · Ind AS 110 Consolidation Procedure for Subsidiaries

Alpha Ltd sold goods costing Rs 60,000 to its subsidiary Beta Ltd for Rs 80,000. At the reporting date Beta Ltd still holds all of these goods in inventory. Ignoring tax, how should the consolidated financial statements treat this transaction?

The intragroup sale and purchase of Rs 80,000 are eliminated in full, and the unrealised profit of Rs 20,000 is removed from closing inventory so it is carried at group cost of Rs 60,000, since profits on intragroup transactions recognised in assets are eliminated in full.

  1. AEliminate the Rs 80,000 sale and purchase, and reduce closing inventory by the unrealised profit of Rs 20,000 so that it is carried at Rs 60,000Correct
  2. BEliminate only the Rs 20,000 profit and leave sales and purchases of Rs 80,000 unchanged
  3. CEliminate the unrealised profit only to the extent of the parent's share, which is Rs 20,000 because the subsidiary is wholly owned and held inventory at Rs 80,000
  4. DRetain the transaction because the goods are still unsold outside the group

Explanation

Intragroup income, expenses and profits recognised in assets such as inventory are eliminated in full. The Rs 80,000 intragroup sale and purchase are removed, and inventory is brought back to cost of Rs 60,000 by removing Rs 20,000 of unrealised profit. Option B leaves the intragroup revenue and cost in the consolidated statement, which is wrong.

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