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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Gupta Ltd owns 60% of Hari Ltd. During the year Gupta Ltd sold goods costing Rs 6,00,000 to Hari Ltd at Rs 8,00,000. At the year end, Hari Ltd still holds one-quarter of these goods in closing stock. For preparing consolidated financial statements, what amount of unrealised profit should be eliminated from closing stock, and where is the sale otherwise treated?

Unrealised profit of Rs 50,000 is eliminated. Profit on the transfer is Rs 2,00,000 and one-quarter of the goods remain unsold, so Rs 50,000 is removed from closing stock. The entire Rs 8,00,000 intra-group sale is also eliminated from consolidated sales and purchases, in full regardless of the 60% holding.

  1. ARs 50,000; intra-group sale of Rs 8,00,000 eliminated from sales and purchasesCorrect
  2. BRs 2,00,000; intra-group sale of Rs 8,00,000 eliminated from sales and purchases
  3. CRs 50,000; only the unrealised profit is removed and sales are retained
  4. DRs 30,000; intra-group sale of Rs 8,00,000 eliminated from sales and purchases

Explanation

Total profit on the sale = 8,00,000 - 6,00,000 = 2,00,000. One-quarter remains unsold, so unrealised profit = 50,000, deducted from closing stock. The full intra-group sale of 8,00,000 is eliminated from consolidated sales and purchases. Rs 30,000 wrongly applies the 60% holding, which is not used for full elimination under AS 21.

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