Company A owns 30% of company B. Company A sells 90K inventory to company B for 200K.
2016 A’s profit on the sale to B = 200 K - 90 K = 110 K
2016 B sells (120 K/200 K) = 60% of the inventory
2016 Total unrealized profit = 110 K * 40% = 44 K
A’s share of the unrealized profit = 44 K * 30% = 13,2 K
In 2017, when company B will sell the 40% remaining inventory, company A will finally be able to recognize the unrealized profit part. But why only recognize its % ownership of it (44 K * 30%)? Where is the other 70%? I thought 110 K (100% !!!) was Company A’s profit on that sale? So, to me, it makes sense that it recognizes 44 K instead of 13,2 K, because 44 K all belongs to Company A, since we started off saying that A’s profit on the sale = 110 K.
But we just started by saying Company A sold 90 K inventory to B for 200 K. 110 K profit for Company A. And now we’re saying, no no no, 110 K * % ownership is for company A, not the whole 110 K.
Doesn’t make too much sense to me.
Hey S2000magician, i finally got the answer elsewhere.
Company A will acount for 100% of the 110K in its Income statement, which makes total sense since it is its profit made from selling 90 K Inventory for 200 K. It will be labeled as something as “Profit from sale of inventory 110 K”.
If Company B sells 100% of that 200 K in 2016, then Company A unrealized profit will be 0.
If Company B sells none of that 200 K in 2016, then Company A’s unrealized profit will be 30% of 110 K, the other 70% will not be considered unrealized profit because they’re not subject to that readjustment of waiting for subsidiary to sell to a third party, they are already considered realized.