Wagner Ltd owns 100% of Korngold Ltd.For the year ended 30 April 20X1, Korngold Ltd reported a profit of $1 million.On 30 April 20X0, Korngold Ltd had sold inventory to Wagner Ltd for a $0.6 million profit.All of this inventory was sold by Wagner Ltd on 1 June 20X0.For the financial year ending 30 April 20X0, what is the effect of consolidation adjustment (if any) in the profit or loss statement, as a result of the profit on this sale?

Question

Quizplus · Accepted Answer

When consolidating financial statements, profits from intra-group transactions must be eliminated until the inventory is sold outside the group. Since Korngold Ltd sold inventory to Wagner Ltd with a profit of $0.6 million and this inventory was sold outside the group in the next financial year, for the year ending 30 April 20X0, the group profit must be reduced by the $0.6 million profit to eliminate the effect of the intra-group sale.

Wagner Ltd Owns 100% of Korngold Ltd