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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Chetan Ltd owns 60% of Dev Ltd. During the year Chetan Ltd sold goods costing Rs 3,00,000 to Dev Ltd for Rs 4,00,000. At year end, Dev Ltd still held one-fourth of these goods in stock. In the consolidated balance sheet, by what amount must closing inventory be reduced to eliminate unrealised profit?

Closing inventory must be reduced by Rs 25,000. The intra-group sale carried profit of Rs 1,00,000, and one-fourth of the goods remain unsold, so Rs 25,000 of unrealised profit is eliminated in full. AS 21 requires complete elimination, not a proportionate share based on the 60% holding.

  1. ARs 25,000Correct
  2. BRs 1,00,000
  3. CRs 15,000
  4. DRs 75,000

Explanation

Total profit on the sale = 4,00,000 - 3,00,000 = 1,00,000. Goods unsold = one-fourth, so unrealised profit = 25,000. AS 21 requires full elimination of intra-group profit irrespective of the parent's 60% holding, so Rs 15,000 (60% of 25,000) is wrong.

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