Final answer:
a. Affects both income statement and balance sheet
An intra-group transaction such as the sale of a plant with unrealized profit impacts the consolidated financial statements by affecting both the income statement and balance sheet. It eliminates unrealized profit from consolidated net income and adjusts the asset's carrying value.
Step-by-step explanation:
The issue at hand involves understanding how intra-group transactions, such as the sale of plant assets with unrealized profit, impact financial statements. Specifically, we are looking at whether such a transaction affects both the income statement and balance sheet, only reflects on the cash flow, has no impact on financial statements, or changes only the retained earnings.
When a company sells an asset to another division or subsidiary within the same group, and a profit is recognized in the sale, this profit is considered unrealized for the group as a whole since the asset is still within the group. This unrealized profit should not be included in the consolidated financial statements until it is realized externally, i.e., when the asset is sold to an entity outside of the group.
Therefore, the correct answer is that an intra-group transaction involving the sale of a plant with unrealized profit affects both the income statement and balance sheet. It would result in eliminating the profit from consolidated net income (impacting retained earnings) and reducing the asset's carrying value on the balance sheet to eliminate the unrealized profit.