Chapter 10, Problem 10.12E

To determine

Tax effects on unrealized intercompany profit:In a taxable transaction, the income tax effects of unrealized intercompany profit eliminations depend on whether the companies within the consolidated entity file a consolidated income tax return or separate tax returns.

When consolidated returns are filed, intercompany transfers are eliminated and only sales outside the consolidated entity both for tax and financial reporting purposes are recognized.

When each company within consolidated entities file separate returns, the profits are taxed individually on the profits of intercompany sales.

The elimination entries for intercompany sale of inventory and land for consolidation worksheet assuming P uses equity method in accounting for its investment in S services.