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ACCA Applied Knowledge · Financial Accounting · Subsidiaries

Parent P sold goods to its 80% subsidiary S during the year for $120,000. All of these goods remain in S's closing inventory. In preparing the consolidated statement of profit or loss, what adjustment is needed to revenue and cost of sales for this intragroup sale (ignoring unrealised profit)?

Both consolidated revenue and cost of sales are reduced by the full $120,000, because intragroup trading is eliminated in full whatever the ownership percentage. The group is one entity, so sales to itself are not revenue. Any unrealised profit in inventory is a separate adjustment.

  1. AReduce both revenue and cost of sales by $120,000Correct
  2. BReduce revenue by $120,000 only
  3. CReduce revenue by $96,000 and cost of sales by $96,000
  4. DReduce cost of sales by $120,000 only

Explanation

Intragroup sales are eliminated in full regardless of the percentage held. Revenue is reduced by $120,000 and cost of sales by the same amount, so there is no profit effect from this step. Applying 80% is wrong because the group is treated as a single entity and consolidation is full.

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