Equity accounting issue

[mike99]

Hi all,

In terms of accounting for interests in joint ventures or associates (equity accounting), how would the following apply at the group level:

H (parent) owns 40% of X and 30% of Y.

X and Y are associates of H Ltd.

During the financial year, X started selling inventory to Y. It sold $300 of inventory, which cost X $200. At the year end, Y had $100 (cost to X = $50) on hand. Y sells 50% mark-up on cost.

From H's perspective: would one need to eliminate a portion of the profit on this transaction at the group level? If so, how would one do it?

 

[Triest123]

It sold $300 of inventory, which cost X $200.
Mark up is $100 / $200 = 50%
GP is $100 / $300 = 33.33%

Stock kept in Y = $100

Cost = $100 - ($100 x 33.33%)
= $66.67

Unrealised profit gained by X is $100- $66.67 = 33.33

So the consolidation adjustment in H Ltd is :
Dr Share of profit in Asso - X $33.33
Cr Investment in Asso - X $33.33
To eliminate the unrealised profit on stock, which is earned by Asso. X

 

[mike99]

Unrealised profit gained by X is $100- $66.67 = 33.33

But H only owns 40% of X?

So the consolidation adjustment in H Ltd is :
Dr Share of profit in Asso - X $33.33
Cr Investment in Asso - X $33.33
To eliminate the unrealised profit on stock, which is earned by Asso. X

The underlying asset is held in Y - why would one credit the asset in X?