About equity accounting for associates

Hi Opentuition Tutor,

Can I ask a couple of questions re accounting treatment for associates?

I understand equity method is used to account for the investment interests in the associates.

Let’s assume there are companies A and B. A has a 30% interest in company B for many years. A does not have any subsidiaries. So there will be no consolidation at the year end. But during the accounting perid, A and B traded with each other, and there are unsold inventories with regard to the trading at the year end.

Q1: When A accounts its past year’s interest in B with equity method, does A need to remove the profit element from the unsold inventory?

Then assume A purchased a controlling interest in company C, and a consolidation is required. From the standards, if A sold goods to associate B and B has the unsold inventory, standards say unrealised profit would need to be removed to the extend of A’s interest in B, the adjustment entries are done as the following:

Dr Cost of Sales (P/L)
Cr investment in associate B (SFP)

Then the increased cost of sales will get transferred to the retained earnings on SFP through the reduced profit on P/L.

Q2: if the associate is the seller, and A has unsold inventory in its books, the adjustment entry is:

Dr Share of the associate’s profit (P/L)
Cr Inventories (SFP)

My question is if equity method means A’s investment value in B is its interest in B, why the hit of the profit on P/L (that debit entry above) does not impact on its investment carrying value on A’s individual SFP (cost of investment + share of associate’s retained earnings movement post acquisition date)?

Thank you.