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BAC300 Assignment (semester 2)
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BAC300 Assignment semester 2. 88% Worthy.
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EXAMPLE 1A. Intragroup sale of inventory
When there is a sale of inventories between the parent and subsidiary, the sale needs to be
eliminated because the inventories are still held in the group. The profit that the seller made,
also needs to be eliminated. This is called unrealised profit. It has not actually been earned
by the group itself. We will look at a scenario where the parent sells inventory to the
subsidiary.
Parent Subsidiary
Cost 13500x100/125= 10800 Cost 13500
Selling price 13500
Profit 2700
Mark up cost+25%
Fix unrealised profit in opening inventories
Retained earnings-opening balance 2700
Inventories 2700
Deferred tax expense 756
Income tax expense 756
Group
Cost 10800
Profit 0
At the end of 2017, the parent recognised 2700 profit that they included in their retained
earnings closing balance which is the retained opening balance of 2018. Therefore when we
consolidate, that 2700 is included in the opening retained earnings of the group and we have
to eliminate it by decreasing our retained earnings opening balance of the group.
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, Opening inventories sold-realise the profit
Inventories 2700
Cost of sales 2700
Income tax expense 756
Deferred tax expense 756
Subsidiary’s books
Inventory decrease 13500
Cost of sales increase 13500
Selling price 14000
Profit increase 500
Group
Increase inventory by 2700 because the subsidiary wrote off too much (they wrote off
R13500 when they were supposed to write off 10800, so to fix a 13500 credit, I will enter a
2700 debit so the correct disposal at cost of 10800 shows as the credit
Selling price 14000
Decrease cost of sales to 10800 (original cost) decrease 13500 debited by subsidiary to
10800 by entering a credit of 2700
Hence increasing profit through cost of sales by 2700
Closing inventories
Value of closing inventory in the subsidiary= 15000
Written down by 1000
Therefore, purchased for 16000 from the parent
Therefore, original cost to parent 16000x100/125= 12800
Unrealised profit 3200
But subsidiary wrote down the inventory by 1000, therefore the inventory is only overstated
by 2200 in the group’s books. The write down goes through cost of sales in the subsidiary’s
books, they increased their cost of sales by 1000 hence reducing profit by 1000. To reduce
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