Company A sells inventory to its 30% owned associate, B. The inventory had cost A $200,000 and was sold for $300,000. B also has sold inventory to A. The cost of this inventory to B was $100,000, and it was sold for $120,000.
Required
How would the intercompany profit on these transactions be dealt with in the financial statements if none of the inventory had been sold at year-end?
Solution
Company A to Company B
| $000 | |
| The intergroup profit is $(300 – 200) | 100 |
| Profit reported would be 100 × 70/100 = | 70 |
The remaining profit would be deferred until the sale of the inventory.
Company B to Company A
The profit made by B would be $(120 – 100) = 20
An amount of 20 × 30/100 would be eliminated from the carrying value of the investment, that is, $6,000.
The alternative is to eliminate the whole of the profit from B’s profit for the period and then calculate the profit attributable to the associate.
