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Hi
If the P sells goods to the sub for $40000 and the goods cost P $30000. At the end of yr the sub had not sold $5000 of the goods – what is the unrealised profit for the group y/e?
Would I do the below:
SP. 40000
Cost 30000
Profit 10000Not sure what to do next?
The $5,000 unsold – is that $5,000 of the original $40,000? I presume that it is
Ok, the profit within the transaction is 1/4 of the sale price / transfer price.
So profit within the transaction is 1/4 x $40,000
And there is still $5,000 in inventory valued at sale price
So: 5,000/40,000 x 10,000 (ie closing inventory as a fraction of transaction sale price multiplied by profit on sale) is $1,250 pup accounted for by deducting from P’s retained earnings
An alternative way of thinking about it is to say that, of the $40,000 sale, one eighth is still in inventory and one eighth of the overall profit on the transaction is 1/8 x $10,000 = $1,250
OK?
Ok thanks yeah I understand that – you take the remaining inventory divide by how much you sold for then x by the profit you would have made
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