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There seems to be different ways this can be done.
1/ dr retained earning cr inventory
profit element only2/ dr revenue (porl)
intra-group sales price
cr cost of sales (porl)
original cost
cr inventory
profit elementBut if you use the first one, adjusting retained earnings, does this not mean you are overstating profit in the PorL?
This is not the right forum to ask this question. You should have posted it in Financial Reporting forum.
As far as your question is concerned, the first adjustment is used when the question only requires Consolidated Statement of Financial Position. As Consolidated Statement of Profit or Loss is not gonna be prepared, so all profit related adjustments have to be made in Retained Earnings.
If you had done this adjustment in CSOPL, the closing balance on Retained Earnings would still be same as you’d bring the adjusted profit into it.Second adjustment is what we do when we’re preparing Consolidated Statement of Profit or Loss. The intra-group sales are removed from revenue and the same amount is removed from Cost of sales as intra-group purchases. As the closing inventory still includes the Unrealised Profit, an adjustment will need to be made to remove it and restate the closing inventory at cost to the group.
Hope it helps.
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