1 This Photo by Unknown Author is licensed under CC BYSA Unrealised profit Closing inventory Reminder of the principle from FIAC6212 Example P parent sold inventory to S subsidiary at cost plus 20 ID: 1030121
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1. FIAC7312Learning unit Unrealised profit in closing inventory1This Photo by Unknown Author is licensed under CC BY-SA
2. Unrealised profit: Closing inventoryReminder of the principle from FIAC6212ExampleP (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 000S → C sale for R12 000 + R3 000 = R15 000As 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.22 May 20192
3. Unrealised profit: Closing inventoryIntragroup transactions: Example continuedIs the above correct? NoThe 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 & COSEffect on consolidated financial statementsRevenue R15 000 Cost of Sales R10 000 GP R5 00022 May 20193Revenue(12 000 + 15 000) 27 000 Cost of sales(10 000 + 12 000)22 000Gross profit5 000DR RevenueR12 000CR Cost of salesR12 000
4. Unrealised profit: Closing inventoryIntragroup transactions: Example continuedWhat happens if the inventory is not sold at year end?S will hold inventory at cost of R12 000P will show GP of R2 000. Did the group make a profit of R2 000? NoDid the inventory cost the group R12 000. NoA journal is required to reverse the unrealised profit.22 May 20194DRCost of sales (reverse GP)2 000CRInventory (valued at cost to GROUP)2 000
5. Unrealised profit: Closing inventoryIntragroup transactions: Example continuedNow 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?YesTax journal: In terms of IAS 12 the carrying amount of the inventory < tax base, giving rise to DTL.22 May 20195DRDeferred tax (SFP) 560CRIncome tax expense (P/L)560