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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

During the year, parent Sunrise Ltd sold goods costing ₹60,000 to its subsidiary Tara Ltd for ₹80,000. At the year end, Tara still holds half of these goods in inventory. In the consolidated statements, what adjustment is needed to remove unrealised profit?

Consolidated inventory and profit should both be reduced by ₹10,000. The intragroup profit was ₹20,000, but only half the goods remain unsold to outsiders, so ₹10,000 of profit is unrealised from the group's viewpoint and must be eliminated.

  1. AReduce consolidated inventory and profit by ₹10,000Correct
  2. BReduce consolidated inventory and profit by ₹20,000
  3. CReduce consolidated inventory by ₹40,000 only
  4. DNo adjustment, because the sale was within the group
  5. Increase consolidated inventory by ₹10,000

Explanation

Total profit on the intragroup sale is 80,000 − 60,000 = 20,000. Half remains in inventory, so unrealised profit is 10,000. This is eliminated from group profit and from inventory. Using 20,000 ignores that half was sold externally.

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