UNREALIZED PROFIT ON CLOSING INVENTORY

Where one company has bought goods from another company in the group and part of these goods are included in the closing inventory, then the selling company is reporting an unrealized profit.

An entry is thus required to reverse the unrealized profit and the overstatement in closing inventory.

The following situation will apply:

a) If the holding company made the sale,
          DR.  Group retained profits
                CR. Group closing inventory
(with the full unrealized profits).

b) If Subsidiary company made the sale:
     DR.  Group retained profits (with holding company share of UP)
     DR.    Minority Interest (With minority Interest share of U.P)
                CR. Group closing inventory (with the full UP)

Note:

Where the subsidiary is company makes the sale, its profits are overstated with the unrealized profit and the subsidiary’s profit belong to both holding company and minority interest. Therefore the reversal of the unrealized profit in the situation will also affect the Minority interest.