Consolidation Elimination - Prior Period Unrealized Profit (Beginning Retained Earnings Adjustment)

💡 Accountant's Note

The prior year elimination deferred $2.125M of intercompany profit in ending inventory (see earlier entry). At the start of the current year, those goods (and their deferred profit) are in beginning inventory — which is sold to external customers in the current year. The carry-forward treatment: the prior year's elimination entry is REVERSED in the current year because the profit is now realized (goods sold to external parties). This is recorded as a beginning retained earnings adjustment (the deferred profit from last year's books) and a reduction of current year COGS (because the inventory was already expensed at the inflated intercompany price — we now reduce COGS to reflect the lower group cost). Net effect: the consolidated income statement in the current year correctly recognizes the profit that was deferred from the prior year.