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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Pioneer Ltd. has a subsidiary, Ganga Plastics Ltd. During the year, Pioneer Ltd. sold goods to Ganga Plastics Ltd. for ₹1,20,000, earning a profit of 25% on cost. At year end, all these goods remain unsold in Ganga Plastics Ltd.'s inventory. Pioneer Ltd.'s own inventory is ₹5,00,000 and Ganga Plastics Ltd.'s inventory (including the goods bought from Pioneer) is ₹3,00,000. The inventory to be shown in the consolidated balance sheet is:

Consolidated inventory is ₹7,76,000. The sale price of ₹1,20,000 includes a profit of ₹24,000, since profit is 25% on cost. This unrealised intra-group profit is eliminated in full from the combined inventory of ₹8,00,000, because AS 21 requires unrealised intra-group profits to be removed fully.

  1. A₹7,76,000Correct
  2. B₹7,70,000
  3. C₹7,80,800
  4. D₹8,00,000

Explanation

Profit included in the transferred goods = 1,20,000 × 25/125 = 24,000. Intra-group profits in closing inventory must be eliminated in full. Consolidated inventory = 5,00,000 + 3,00,000 − 24,000 = 7,76,000. Option B treats 25% as a margin on selling price (30,000). Option C removes only 80% of the profit, which AS 21 does not permit.

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