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Hi John,
Would you be able to explain to me the concept of adding the unrealised profit to the COGS using the below example?
If A owns 70% of B. B sold $1,000 worth of product to A. Cost of B was $500. At the end of the financial year, A had 25% of the good lefts unsold. Adjustments for the consolidated statement would be as follows:
– 1000 to Revenue (To reflect adjustment to B’s revenue), -1000 to COGS (To reflect adjustment to A’s Costs)
+ 125 to COGS, -125 to inventory
As mentioned above, this is to reduce consolidated gross profit (as well as its the formula when you decrease inventory). But what is the logic of this?
I would think that you have to reduce COGS by 125 instead, as this was extra cost booked into B’s accounts, which was the amount not actually sold.
Thank you!