Intra-entity transaction - a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gross profit on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. For the yr of transfer - the unrealized gross profit from the inventory account on the balance sheet & from the ending inventory balance within COGS. In the yr following transfer, the realized gross profit must be recognized within the consolidation process. Reductions are made on the worksheet to the beginning inventory component of COGS & to the beginning retained earnings balance of the original seller. The gross profit is thus taken out of last year's earnings & recognized in the CY through the reduction of COGS. If the transfer was downstream & the parent has applied the equity method, the adjustment in the subsequent yr is made to the investment in subsidiary account rather than retained earnings