During 2021, Miner Co. sold inventory to its parent company, Bennett Corp. Bennett still owned the entire amount of inventory purchased at the end of 2021. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2021?

A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity. Since Bennett still owned the inventory at the end of the year, the intra-entity transfer is merely the internal movement of an asset, an event that creates no net change in the financial position of the business combination taken as a whole. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated net income and consolidated net assets by transferring inventory between parent and subsidiary.