What is the correct accounting treatment for an intercompany sale of inventory where the inventory is still held by the buying entity at year-end, and how does it affect non-controlling interest (NCI) if the seller is a subsidiary with NCI?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The unrealized profit in ending inventory must be eliminated in full against the seller's profit. If the seller is a subsidiary with NCI, the elimination is allocated proportionally between the parent and NCI based on their ownership percentages. The entry is: Dr Cost of Sales (or Sales) and Cr Inventory for the unrealized profit. NCI is reduced by its share of the eliminated profit. This ensures consolidated profit reflects only realized profits from external parties.
WHAT INTERVIEWERS LISTEN FOR
- ✓Eliminate unrealized profit in inventory
- ✓Elimination is full, not proportional to ownership
- ✓Allocate elimination to NCI based on ownership
COMMON MISTAKES
- ✗Eliminating only the parent's share of unrealized profit
- ✗Ignoring NCI impact
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