Dear Sir,
I have an inquiry regarding unrealised profits within intra group sales. From my understanding, for example, if a parent sells to a subsidiary assets for resale (say inventory) which cost $80 but was sold at $100 for $20 profit.
The parent (seller) records two entries:
DR Receivables $100
CR Revenue $100 [to realise a sale]
DR COS $80
CR Inventory $80 [to transfer inventory into cost of sales (assuming a perpetual basis)]
The subsudiary (buyer) records an entry (again assuming a perpetual basis):
DR Inventory $100
CR Payables $100 [to realise purchase of inventory]
The required accounting treatment would be to cancel out receivables with payables, eliminate pup, and cancel out cost of sales against revenue. My question is, why does revenue cancel out with a corresponding cost of sale in the receiving company. payables and receivables cancel out because they are settlements within the group, but why does revenue cancel out with a cost of sale that is not realised (still in inventory)??