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- February 20, 2017 at 1:14 pm #373349
If there is associate company sell inventory to parent company or vice versa
how to treat the unrealised profit on inventory in consolidated income statement?
thanksFebruary 20, 2017 at 1:26 pm #373350This is an area where I differ from the official publishers’ texts
The very easy way to eliminate the group’s share of the pup that arises on a transaction between the group and the associate is to, always, deduct the pup from the associate’s post-acquisition retained earnings
This affects two figures on the statement of financial position so double entry is maintained
First, by that reduction from the associate’s retained earnings we reduce automatically the group’s share (in $ terms) of the associate’s post-acquisition retained earnings in working W3 Consolidated Retained Earnings
Then the double entry is again automatically satisfied in working W5A Investment in Associate because that calculation is based on cost of investment + the group’s share of the associate’s post-acquisition retained earnings – and that’s a figure that we have just reduced by the pup
So there’s no affect on group inventory
The alternative approach that you will come across in BPP and Kaplan is to differentiate between upstream and downstream transactions and, if I’m correct, the downstream transaction results in a deduction of the pup from group inventory and from the parent’s retained earnings
But I am happy to stick with the very easy, quick and simple method of ALWAYS deducting the pup from the associate’s this year’s profits whether it’s an upstream, downstream or lost in a whirlpool transaction
OK?
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