Question

Party Ltd owns all of the shares in Sunny Ltd. On 1 March 2020, Party Ltd sold inventories that cost $38,000 to Sunny Ltd for $44,000. At the end of the financial year, being 30 June 2020, a third of the inventories were sold by Sunny Ltd to entities external to the group. In relation to this intragroup transaction, which of the following statement is correct?

a. Consolidated profit will decrease by $4,000

b. Consolidated sales will increase by $44,000

c. Consolidated sales will decrease by $38,000

d. Consolidated profit will decrease by $6,000

Answer 1

Correct: a. Consolidated profit will decrease by $4,000

• Unrealized profits resulting from intra-group transactions included in the carrying amount of inventory is eliminated.
• Profits from intra-group sales = Intra-group sales - cost = $44,000 - $38,000 = $6,000
• Out of the $6,000 profit, 1/3^rd is realized by the sale to external entities. 2/3^rd of the inventory is remaining and unrealized profit included in its carrying value is to be eliminated.
• Unrealized profit = $6,000 × 2/3 = $4,000
• This elimination of unrealized profit will decrease consolidated profit by $4,000.