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Can you explain me how the below should be treated in the group accounts?
Marchant is the parent and Nathan is the subsidiary. M sold inventory to N for it’s FV of 12 million. M made a loss on the transaction of 2 million. N still holds 8 million of this inventory at the year end.
Marchant had OVERVALUED the inventory in its accounts – it should have been at lower of cost and NRV – 12.
I know you want to Dr Inv Cr P&L with 2 🙂 in the group accounts – but that would push the inventory above NRV……………..which is naughty.
So – do nothing.
That means, M should have recorded NRV loss of 2m prior to selling to N? And therefore loss has already been realised. And also intercompany transaction must be eliminated right? So 12m shouldn’t be included in revenue and COS right?
Perfect – everything you say is right.
And, as you say, we still have to eliminate the inter-company sale/purchase.
Thanks a lot for your explanation :). And I have another little doubt. Can you please clarify?
Let’s say P owns 100% of the S. P sold goods to S during the year and there is unrealized profit amounting 10,000. So this must be removed from the group accounts by crediting the group inventory and debiting retained earnings of P. However, S would have arrived at their retained earnings figure without eliminating the 10,000. Therefore this would have increased the RE by 10,000 as the closing inventory is increased by 10,000. And then we allocate the parent 100% from the RE of S. So here, isn’t the profit overstated? And is there any more adjustment required?
(I got this in Kaplan work book and they had not given any adjustment except CR inventory and DR retained earnings)
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