Intercompany Inventory Transactions
Eliminating Unrealized Profit
When inventory is sold between group companies and remains unsold at year-end, the profit is unrealized from the perspective of the consolidated entity. The unrealized profit must be eliminated until the inventory is sold externally.
- Eliminate intercompany sales.
- Adjust ending inventory.
- Reduce consolidated gross profit.
- Recognize profit only after external sale.
Tip
Focus on the ending inventory remaining within the consolidated group.
Summary
Inventory profit eliminations ensure that only realized profits appear in consolidated income.