What is Unrealized intercompany profit?
In short
Profit on sales between members of a consolidated group is unrealized while the goods are still held within the group. It is eliminated from consolidated inventory and income until the goods are sold to outsiders.
Key takeaways
- On downstream sales (parent to subsidiary), the whole elimination is charged to the parent.
- On upstream sales (subsidiary to parent), the elimination is shared with the noncontrolling interest.
- The same applies to profit on intercompany sales of equipment, recognized as the asset is depreciated.
Example
A parent sells goods costing $60,000 to its subsidiary for $80,000, and a quarter is unsold at year-end: $5,000 of profit is eliminated.
Where it's tested
FAR: Business Combinations & Consolidations — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Acquirer purchases 100% of Target for $1,200,000 cash. Target's identifiable assets have a fair value of $1,600,000 and liabilities assumed have a fair value of $500,000. What should Acquirer recognize?