Financial Statments - Intra-group sales

Tjcgti

Hi,

Can some please help me get my head round this description in the BPP book (Page 285). I understood it a few days ago but now can't seem to remember the reason.
Book states:

Suppose that P Ltd sells goods costing £10,000 to its subsidiary S Ltd for £20,000.

The revenue of P Ltd and the cost of sales of S Ltd both increase by £20,000.
P Ltd makes a profit of £10,000 on the sale.

At the year-end S Ltd still has half the goods in inventory.

Although P Ltd has made a profit of £10,000 as a result of the sale, the group has only made a profit of £5,000 (10,000 / 2) which is the profit on the sale of goods to parties outside of the group.

The goods which S Ltd still has in inventory are valued at their cost to S Ltd of £10,000 which includes the profit made by P Ltd on the transaction. The cost of the inventory to the group is the price that P Ltd originally paid for the goods: £5,000 (10,000 / 2)


Right so what I am trying to work out is how the figure of £5,000 has come about. I understand its £10,000 / 2 but why divided by 2?
Its staring me right in the face in the description but can't get my head round it. Can someone help please?

Many many many thanks

Tristan

SandyHood

This topic is called provision for unrealised profit

In your example the Group has sold (to outsiders) goods that initially cost £5,000
AND S still has (in inventory) goods that initially cost £5,000

To get to that position P bought £10,000 worth of good, and sold them to S for £20,000

So P as an individual company has £10,000 profit from the sale
But S still has half of those goods in inventory (£10,000)

But as a group, the group retains the inventory. The units in stock are exactly those held by S, but S values them at the price they cost (I.e. £10,000) so the consolidation takes off the unrealised profit within that valuation. When P sold them this inventory had cost P £5,000 and P added £5,000 profit

So taking a snap shot of the group at the year end we need the value of the closing inventory to be £5,000 lower than the value in S's books (to take account of the profit P made which has not yet been realised)

This unrealised profit then reduces the closing inventory value for the group and affects:

1. The cost of sales in the Consolidated Statement of Comprehensive Income; and
2. The inventory in the Current Assets on the Consolidated Statement of Financial Position

Tjcgti

Excellent, understand it now.

Thanks for that Sandy:thumbup1: