Answer to Question #113960 in Accounting for Lara

Question

parent company buys merchandise from its 90% owned subsidiary above cost and does not resell it before year end. What percent of the unrealized profit in the parent's ending inventory shoud be removed from the consolidated net income?

Answer 1

Where a group entity sells goods to another, the selling entity, as a separate legal entity, recognises profits made on those sales. If these goods are still held in inventory by the buying entity at the year end, however, the profit recognised by the selling entity, when viewed from the standpoint of the group as a whole, has not yet been earned, and will not be earned until the goods are eventually sold outside the group. On consolidation, the unrealised profit on closing inventories will be eliminated from the group’s profit, and the closing inventories of the group will be recorded at cost to the group.