What is the format for recording the unrealised profit in intra-group transactions?

The recording of unrealised profit in intra-group transactions is correctly reflected by decreasing retained earnings and cost of sales. When subsidiaries transact with one another and one subsidiary sells goods to another at a profit, that profit is not realised from the perspective of the group as a whole until the goods are sold to an external party. Therefore, to avoid overstating profit in the consolidated financial statements, the unrealised profit must be eliminated.

This is done by adjusting the cost of sales to reflect the sale price without the profit margin, effectively reducing the cost of sales in the consolidated statement and consequentially reducing the retained earnings that could potentially be overstated by the unrealised profit. It helps ensure that the financial statements present a true and fair view of the group's financial performance without including profits that have not yet been realised externally.

Other options do not represent the ideal approach. For example, increasing the asset’s value would misstate the balance sheet, and recording it as a liability does not correctly reflect the nature of the unrealised profit. A memorandum entry, although useful for internal accounting, does not directly affect the financial statements in the way that necessary adjustments to retained earnings and cost of sales do.