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My confusion: Since this is an upstream transaction (associate selling to investor), I thought the unrealised profit should reduce the “share of profit from associate” in the SPL (using the journal entry:
DR Share of profit from associate
CR Inventories
So why is the unrealised profit deducted from the investment in associate (SOFP) instead?Question: Ulysses Co owns 25% of Grant Co, purchased for $5 million on 1 May 20X8. At acquisition, Grant had retained earnings of $7.4 million, and at 31 Oct 20X8, retained earnings were $8.5 million after a $1 million dividend. On 30 Sept, Grant (the associate) sold $600,000 of goods to Ulysses (the investor) at a 30% profit margin. Ulysses hadn’t resold the goods by year-end.
The investment in Grant is reported at $5,230,000, and the working includes:
Cost: $5,000,000
25% of post-acquisition retained earnings: $275,000
Less: Unrealised profit: $45,000 –> im confuse why is this hereHi,
Yes, you would reduce the line item in the SPL as you say, but on the CSFP then we would need to reduce the group retained earnings and not as they have, reducing the investment in associate.
Thanks
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