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FIAC7312 Learning unit Unrealised profit in closing inventory

FIAC7312 Learning unit Unrealised profit in closing inventory. This Photo by Unknown Author is licensed under CC BY-SA. Unrealised profit: Closing inventory. Reminder of the principle from FIAC6212 Example P (parent) sold inventory to S (subsidiary) at cost plus 20%.

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FIAC7312 Learning unit Unrealised profit in closing inventory

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  1. FIAC7312 Learning unit Unrealised profit in closing inventory This Photo by Unknown Author is licensed under CC BY-SA

  2. Unrealised profit: Closing inventory Reminder of the principle from FIAC6212 Example P (parent) sold inventory to S (subsidiary) at cost plus 20%. S sold inventory to C (external customer) at cost plus 25%. P → S sale for R10 000 + R2 000 = R12 000 S → C sale for R12 000 + R3 000 = R15 000 As long as both transactions take place in same accounting period there is no problem. Group profit on transaction: R5 000 (P R2 000 & S R3 000) Now prepare the consolidated statement of profit or loss.

  3. Unrealised profit: Closing inventory Intragroup transactions: Example continued Is the above correct? No The group did not record external revenue of R27 000 & inventory did not cost the group R22 000. A journal is required to eliminate the intragroup revenue & COS Effect on consolidated financial statements Revenue R15 000 Cost of Sales R10 000 GP R5 000

  4. Unrealised profit: Closing inventory Intragroup transactions: Example continued What happens if the inventory is not sold at year end? • S will hold inventory at cost of R12 000 • P will show GP of R2 000. Did the group make a profit of R2 000? No Did the inventory cost the group R12 000. No A journal is required to reverse the unrealised profit.

  5. Unrealised profit: Closing inventory Intragroup transactions: Example continued Now consider the tax effect. If cost of sales is debited, profit will decrease. In terms of the matching concept if profit decreases, should tax expense also decrease? Yes Tax journal: In terms of IAS 12 the carrying amount of the inventory < tax base, giving rise to DTL.

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