ACCT3011 Chap.4 Intragroup Borrowings and Inventory

Intragroup Borrowings and Inventory

This chapter applies the economic-entity rule to services, reciprocal balances, loans and inventory. Internal revenue, expense, receivables and payables disappear because the group cannot transact with itself. Inventory requires a second calculation: profit embedded in goods still held inside the group remains unrealised.

The worksheet also distinguishes closing inventory from prior-year profit carried through opening retained earnings and recognises tax effects on the adjusted carrying amount.

What this chapter covers

• 01

  Reciprocal balance elimination

• 02

  Internal service income

• 03

  Intragroup loans and interest

• 04

  Closing unrealised profit

• 05

  Opening inventory reversal

• 06

  Deferred tax on inventory

Worked example · free

Closing inventory profit

Key terms

Unrealised profit

Unrealised profit is internal profit not yet earned from an external party.

Reciprocal balance

A reciprocal balance is an internal receivable paired with another group entity's payable.

Opening inventory adjustment

An opening inventory adjustment carries a prior consolidation effect through opening equity.

Intragroup Borrowings and Inventory FAQ

Exam move

Intragroup transactions are real to each legal entity but invisible to the group; The consolidated statements should show dealings with external parties only; That principle produces three distinct tasks: cancel reciprocal balances and internal income or expense, restore group-based carrying amounts, and recognise any related tax effect;

For management fees, interest and other internal services, eliminate the seller's revenue against the buyer's expense; For loans, remove the internal receivable and payable, then remove internal interest income and expense;

Differences between the reciprocal balances are warning signals, not amounts to plug; Timing, accrued interest or recording errors must be reconciled before elimination; Inventory adds a profit layer; Eliminate the full internal sale and purchase or cost-of-sales effect;

Then ask how much inventory remains inside the group at reporting date; Profit embedded in that unsold portion is unrealised from the group's perspective, so reduce inventory and group profit; If all goods reached external customers before year-end, no closing unrealised profit remains even though the internal sale itself is still eliminated;

Opening inventory requires a time shift; Profit removed from closing inventory last year sits in opening retained earnings this year; When the goods leave the group, that profit becomes realised in the current period; The worksheet reverses the prior effect through opening equity and adjusts current cost of sales;

Treating it as another current internal sale misstates the period in which group profit is recognised; Tax follows the adjusted carrying amount; When consolidation reduces inventory but the tax base remains tied to the buyer's legal-entity amount, a deductible temporary difference can arise;

Compute the unrealised profit first, apply the tax rate second, and label the deferred tax entry separately; Original scenario; Parent sells inventory costing $120,000 to Subsidiary for $150,000; At year-end, Subsidiary still holds 40% of the units;

The tax rate is 30%; Working; Internal profit is $30,000; Unrealised profit is $30,000 × 40% = $12,000 ; Eliminate the internal sale and purchase effect, reduce closing inventory and group profit by $12,000, and recognise a deferred tax asset of $12,000 × 30% = $3,600 ; The after-tax reduction in group profit is $8,400; The remaining goods are sold externally next year; What changes in the consolidation worksheet?

Pass one cancels reciprocal revenue, expense, receivable and payable; Pass two restores the asset to its cost to the group; Pass three records tax on the temporary difference; The unsold proportion must satisfy 0 ≤ proportion ≤ 1; Naming the pass beside each journal makes a long worksheet much easier to audit; An upstream or downstream sale changes which owner's profit is affected when non-controlling interests are introduced, but it does not change the economic-entity rule; First find the unrealised group profit correctly; allocation comes after measurement; All inventory carrying prior-year internal profit is sold to external customers this year; Explain the opening-equity and current cost-of-sales effects; Only half of the opening affected inventory leaves the group; What schedule proves the closing adjustment?

The legal sale occurred in the prior period; This year's worksheet begins with the consolidation effect embedded in opening retained earnings, not another debit to current sales; Track the inventory units or proportion that remain inside the group and release profit only as those units reach outsiders; The remaining unrealised profit must equal the amount by which consolidated inventory is reduced; The realised portion must explain the current cost-of-sales correction; When those numbers do not reconcile, the unsold fraction, margin basis or time classification is wrong; Tax should follow the remaining carrying-amount difference rather than the original internal sale.

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