ACCA FR December 2026: Unrealised Profit in Inventory — Mark-Up vs Margin

Unrealised profit in inventory is a mark-up-versus-margin problem, and it costs FR candidates marks every sitting. If the question says "mark-up", the profit is 25/125 of the selling price, not 25%.

Where the marks go

In FR group questions, intragroup trading is the classic place to drop easy marks. The consolidation mechanics are simple: strip out the intragroup sale and purchase, then remove the unrealised profit still sitting in closing inventory. The trap is calculating that profit.

The question gives you a percentage. Candidates apply it to the wrong base. A mark-up is a percentage of cost. A margin is a percentage of selling price. The unrealised profit sits inside the selling price, so a mark-up must be converted before you use it.

The second slip is who bears the adjustment. If the parent sold to the subsidiary, the whole provision for unrealised profit (PUP) hits the parent's profit, so it comes off group retained earnings. If the subsidiary sold to the parent, the PUP reduces the subsidiary's post-acquisition profit, so the non-controlling interest (NCI) takes its share.

Third: the inventory adjustment lives in the statement of financial position. Consolidated inventory is reduced by the PUP. Miss that and your statement does not balance with your retained earnings.

Worked example

Parent sells goods to its 80% subsidiary for $12,000 at a mark-up of 25% on cost. Half of the goods remain in the subsidiary's inventory at the year end.

Wrong: $12,000 x 1/2 x 25% = $1,500 PUP. This applies the mark-up to the selling price. It overstates the adjustment.

Correct: Mark-up of 25% means selling price is 125% of cost, so profit is 25/125 = 20% of selling price. PUP = $12,000 x 1/2 x 20% = $1,200.

Entry: Dr Group retained earnings $1,200, Cr Consolidated inventory $1,200. Because the parent was the seller, the NCI is untouched. Had the subsidiary been the seller, you would charge the $1,200 to the subsidiary's profit and NCI would absorb 20% of it ($240).

If the question gives a margin instead, use it directly: a 20% margin on $6,000 of unsold goods is $1,200. Read the one word carefully.

What to do

1. Convert before you calculate. Write "mark-up 25% = 25/125" or "margin 20% = 20/100" in the margin of your answer before any arithmetic. Make it a reflex.

2. Tag the seller. Mark "P sold" or "S sold" next to the PUP working. That one label decides whether NCI is affected.

3. Post both sides. Put the PUP in your retained earnings working and deduct it from consolidated inventory. Then tick them off against each other.

The bottom line

Group accounting is one of the most heavily examined areas of FR, and PUP appears in it again and again. It is also one of the cheapest sets of marks to secure, because it is pure method with no judgement involved.

Mark-up is on cost. Margin is on selling price. Get it wrong and the rest of your consolidation is wrong with it.