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ACCA Strategic Professional · Strategic Business Reporting (International) · Group accounting including statements of cash flows

Parent P sold inventory to its 75% subsidiary S at a cost of $80,000 for $100,000. At the year end, half of the inventory remains in S's inventory. For the consolidated statement of financial position, what adjustment is required for the unrealised profit?

Reduce consolidated inventory and group retained earnings by $10,000. The profit on the sale is $20,000, half of the goods remain, so $10,000 is unrealised. Because the parent made the sale, the whole adjustment is borne by the parent's retained earnings, not shared with non-controlling interest.

  1. AReduce consolidated inventory and retained earnings by $10,000Correct
  2. BReduce consolidated inventory by $20,000 and retained earnings by $10,000
  3. CReduce consolidated inventory by $10,000 and allocate $2,500 of it to non-controlling interest
  4. DReduce consolidated inventory by $10,000 and retained earnings of S only

Explanation

Unrealised profit = $20,000 x 50% = $10,000. Since P is the seller (upstream is not involved), the whole provision is charged to the parent's retained earnings, and inventory falls by $10,000. Allocating part to NCI would apply only to a sale by the subsidiary.

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