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

Case: On 1 April, Varuna Industries Ltd sold goods costing Rs 8,00,000 to its 80%-owned subsidiary Kaveri Components Ltd for Rs 10,00,000. By 31 March, Kaveri had sold 60% of these goods to outside customers, and the remaining 40% is in Kaveri's closing inventory. What unrealised profit must be eliminated from consolidated closing inventory, and against whom is it adjusted for a downstream sale?

Rs 80,000 of unrealised profit is eliminated, charged wholly to the parent's equity. The total profit is Rs 2,00,000 and 40% of the goods remain unsold to outsiders. Because the parent sold to the subsidiary (a downstream sale), no portion is allocated to non-controlling interests.

  1. ARs 80,000, fully against the parent's (owners') equityCorrect
  2. BRs 80,000, shared 80:20 between parent and non-controlling interests (NCI)
  3. CRs 2,00,000, fully against the parent's equity
  4. DRs 1,20,000, fully against the parent's equity

Explanation

Total profit on the intra-group sale = 10,00,000 - 8,00,000 = Rs 2,00,000. 40% of the goods remain in inventory, so unrealised profit = 2,00,000 x 40% = Rs 80,000. Varuna is the seller (a downstream sale), so the whole elimination is borne by the parent's equity and none is allocated to NCI. The 80:20 split applies only to upstream sales.

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