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CA Intermediate · Advanced Accounting · AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

Tara Ltd holds 40% of the equity of Uday Ltd, an associate. During the year Tara sold goods costing ₹40,00,000 to Uday for ₹50,00,000. At the year end, 30% of these goods (by value of the sale) remain unsold in Uday's inventory. Uday Ltd reported a profit after tax of ₹60,00,000 for the year. What amount should Tara's consolidated statement of profit and loss include as its share of the associate's profit after eliminating the unrealised profit, as per AS 23?

The amount is ₹22,80,000. Tara's 40% share of the associate's profit is ₹24,00,000. The unrealised profit in closing inventory is ₹3,00,000, and only Tara's 40% share, ₹1,20,000, is eliminated. This leaves ₹22,80,000.

  1. A₹21,00,000
  2. B₹22,80,000Correct
  3. C₹24,00,000
  4. D₹25,20,000

Explanation

Profit on the sale is 10,00,000 (20% of sales). Unrealised profit in closing inventory = 30% × 10,00,000 = 3,00,000. AS 23 eliminates unrealised profit only to the extent of the investor's interest, so 40% × 3,00,000 = 1,20,000. Share of profit = 40% × 60,00,000 = 24,00,000, and 24,00,000 − 1,20,000 = 22,80,000. Eliminating the full 3,00,000 gives 21,00,000, which is wrong. Adding the unrealised profit gives 25,20,000, which is also wrong.

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