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I have a confusion on these points. Could you please explain them.
1) In consolidated SOFP: The intra-group trading is when one party sells and another party purchases the goods but it leads to several problems such as:
a). Intra-group trading transaction
b). Unrealized profit being charged by seller party
c). Unsold inventory left in buyer accountWe dealt intra-group trading in the following way:
2. Remove intra-group trading by passing this journal entry:
Payables (debit)
Receivables (credit)3. To remove unrealized profit from seller account:
If the parent sells to subsidiary
Group Retained Earning (debit)
Inventory (credit)If the subsidiary sells to parent
Net Assets (debit)
Inventory (credit)4. To remove overvalued inventory from buyer account:
Net Assets (debit)
Inventory (credit)Is that all correct?
Hi,
Yes, that is all correct but I’m not sure by what you mean with regards to the final point removing overvalued inventory. This has already been done with the final entry in the third point.
Thanks
I’m confused at this bit. When we face any intra-group trading transaction then firstly we need remove this balance by debiting payables and crediting receivables (no problem here!)
Then we need to remove the unrealized profit that was charged by the selling company to the buying company.
Let’s say parent is a selling company and subsidiary is a buying company we should debit group retained earning and credit inventory. However if the subsidiary was the selling company then we need to debit net assets and credit inventory.
The reason we credit the inventory from the consolidation is because of the fact that inventory remain unsold, therefore, we need to credit to remove any overvalued inventory from consolidation accounts?
Is that correct ?% now?
Hi,
We only need to remove unrealised profit if there is inventory still held at the end of the year. If there isn’t then then there is no PURP but we would need to adjust for any outstanding intra-group receivable/payable balances.
Your understanding of the entries to remove the unrealised profit depending on who has sold the inventory is correct.
Thanks
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