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CA Intermediate · Advanced Accounting · AS 21 Consolidated Financial Statements

Tara Ltd holds 60% of Uday Ltd. During the year Tara Ltd sold goods costing Rs 3,00,000 to Uday Ltd for Rs 4,00,000. At the year end, 40% of these goods remain unsold in Uday Ltd's inventory. For consolidated financial statements, what is the unrealised profit to be eliminated from closing inventory and from consolidated profit?

Rs 40,000 must be eliminated. The profit on the intragroup sale is Rs 1,00,000, and 40% of the goods remain unsold, so unrealised profit is Rs 40,000. AS 21 requires intragroup profits to be eliminated in full, regardless of the parent's percentage holding.

  1. ARs 40,000Correct
  2. BRs 60,000
  3. CRs 1,00,000
  4. DRs 24,000

Explanation

Profit on the sale = 4,00,000 - 3,00,000 = Rs 1,00,000. Portion in closing stock = 40%, so unrealised profit = Rs 40,000. AS 21 requires intragroup unrealised profit to be eliminated in full, not only to the extent of the parent's 60% holding, so Rs 24,000 is wrong.

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