Where an investor sells inventories to an associate and the inventories are still on hand at the end of the year, the investor's share of the associate's profit is:
A) not affected as unrealised profits are only considered to arise in a parent-subsidiary relationship.
B) not affected as the unrealised profit is in the books of the investor, not the associate.
C) increased by the investor's share of the unrealised profit.
D) decreased by the investor's share of the unrealised profit.

Question

Quizplus · Accepted Answer

When an investor sells inventories to an associate and those inventories are still on hand at the end of the year, the investor's share of the associate's profit must be decreased by the investor's share of the unrealised profit. This adjustment is necessary to eliminate profits that have not been realized from an external party's perspective, ensuring that the financial statements reflect only realized gains.

Where an Investor Sells Inventories to an Associate and the Inventories