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ACCA Applied Knowledge · Financial Accounting · Subsidiaries

Parent owns 80% of Sub. During the year Parent sold goods costing $60,000 to Sub for $80,000. At the year end, half of these goods remain in Sub's inventory. What adjustment is needed to consolidated inventory and where is the other side of the entry made, if Parent was the seller?

Reduce consolidated inventory by the $10,000 unrealised profit, being half of the $20,000 margin, and debit group retained earnings. Since the parent made the sale, the whole adjustment is borne by the parent's reserves and none is allocated to non-controlling interest.

  1. AReduce inventory by $10,000; debit group retained earnings (Parent's) by $10,000Correct
  2. BReduce inventory by $20,000; debit group retained earnings by $20,000
  3. CReduce inventory by $10,000; debit non-controlling interest by $2,000 and retained earnings by $8,000
  4. DReduce inventory by $8,000; debit retained earnings by $8,000

Explanation

Unrealised profit = (80,000 − 60,000) × 50% = $10,000. Because Parent is the seller, the whole provision is charged to Parent's (group) retained earnings, with no NCI share. The $2,000/$8,000 split would apply only if Sub were the seller.

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