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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Financial Reporting

Case: Ganga Ltd (parent) sold goods costing ₹6,00,000 to its 80%-owned subsidiary Yamuna Ltd for ₹8,00,000. At the year-end, Yamuna still holds 25% of these goods. Ganga's tax effect is to be ignored. What is the unrealised profit to be eliminated on consolidation, and against what is it adjusted?

The unrealised profit is ₹50,000, being 25% of the ₹2,00,000 profit on the intra-group sale. It is eliminated from closing inventory and consolidated profit, and since the parent sold the goods (downstream), the full amount is borne by the parent's owners, not non-controlling interest.

  1. A₹2,00,000, fully against consolidated retained earnings
  2. B₹50,000, fully against closing inventory and consolidated profit; non-controlling interest is not charged because the seller is the parentCorrect
  3. C₹50,000, shared 80:20 between the parent and non-controlling interest
  4. D₹40,000, being 80% of the unrealised profit

Explanation

Profit on the sale = 8,00,000 − 6,00,000 = 2,00,000. Unrealised portion = 25% × 2,00,000 = ₹50,000. It is eliminated from inventory and from consolidated profit. Because Ganga (the parent) is the seller (downstream), the whole elimination falls on the parent's owners, not on NCI. Sharing 80:20 would apply only to upstream sales.

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