how will unrealised profit affecting group cost of sale?

First of all, this initial step of cancellation is not dependent upon which entity sold and which entity bought – the cancellation adjustment is exactly the same, as follows:

Add the revenue line across A + B and then deduct the $12m from the total

Add the cost of sales line across A + B and then deduct the $12m from the total

That has removed the entire transaction from both revenue and from cost of sales

But we have a lingering issue – there is an unrealised profit so far as the group is concerned remaining in that $2m that B has not yet sold and that profit has been recognised as having been realised within the records of A

So we need a provision for unrealised profit in the records of A

1) Calculate the extent of that unrealised profit – the sale transaction recognised a $3m gain on the sale of $12m so the profit element is 1/4 of the transfer price

When applied to those goods still in B inventory, that computes to1/4 * $2m = $500k

2) Adjust the A records for that $500k by increasing the A cost of sales (that’s a reduction in the value of closing inventory in the cost of sales calculation)

By increasing the cost of sales, that has the effect of reducing A’s original profit figure

The double entry for this adjustment is to reduce the current asset of A’s closing inventory

From a ‘Balance Sheet’ perpective, assets have decreased by $500k and shareholders’ funds (retained earnings) have decreased by $500k

The combined affect of (1) cancellation with (2) pup adjustment is a reduction in the consolidation cost of sales by $12m together with an addition to cost of sales of $500k – an aggregate amount of a reduction in the consolidated statement of profit or loss of $11,500,000

Clear?