Financial Statments - Intra-group sales


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



  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    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
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  • Tjcgti
    Tjcgti Registered Posts: 40 ? ? ?
    Excellent, understand it now.

    Thanks for that Sandy:thumbup1:
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