Unrealized profit in inventory

 Unrealized profit in inventory

The group companies are not deemed to earn profit from each other, therefore, if there is unsold inventory in the group which includes a profit from a group company. Then this profit must be eliminated from the inventory. It means that not only the retained earnings will be reduced by the amount of unrealized profit but the inventory amount will also be reduced.

Example of unrealized profit

ABC & company sold $ 50,000 to A & Co. The A & Co has subsidiary with name S & Co. The good sold to S by A & Co is $ 60,000. The goods are in the stock of S & Co at the reporting date.

Solution

 In this example the unrealized profit is $ 10,000 i.e. ( 60,000 – 50,000) this is the amount of profit earned the A & Co from S & Co and the inventory is still in S & Co , therefore this is unrealized profit for Group.

Date	Particulars	Dr.	Cr.
	Retained Earning	$ 10,000
	Stock		$10,000