Advanced Accounting
14th Edition
ISBN: 9781260247824
Author: Joe Ben Hoyle, Thomas F. Schaefer, Timothy S. Doupnik
Publisher: RENT MCG
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Chapter 5, Problem 1P
To determine
Identify the appropriate answer for the given statement from the given choices.
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The sale of inventory items by a parent company to an affiliated company
a.
enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining.
b.
affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
c.
does not result in consolidated income until the merchandise is sold to outside entities.
d.
does not require a working paper adjustment if the merchandise was transferred at cost.
The material sale of inventory items by a parent company to an affiliated company
a. Affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
b. Enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining
c. Does not result in consolidated income until the merchandise is sold to outside parties.
d. Does not require a working paper adjustment if the merchandise was transferred at cost.
Please answer the following questions relating to unrealized profit in a business combination.
1) Intra entity transfers between the components of business combinations are quite common. Why do these intra company transactions occur frequently?
2) How are unrealized inventory gross profit created, and what are the necessary consolidation entries created to account for these gains?
3) How do intra entity profit present in any year affect the noncontrolling Interest calculation?
Chapter 5 Solutions
Advanced Accounting
Ch. 5 - Prob. 1QCh. 5 - Prob. 2QCh. 5 - Prob. 3QCh. 5 - Prob. 4QCh. 5 - James, Inc., sells inventory to Matthews Company,...Ch. 5 - Prob. 6QCh. 5 - Prob. 7QCh. 5 - Prob. 8QCh. 5 - Prob. 9QCh. 5 - Prob. 10Q
Ch. 5 - Prob. 11QCh. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 8PCh. 5 - Prob. 11PCh. 5 - What is the total of consolidated cost of goods...Ch. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - What is the consolidated total for inventory at...
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- S1: The amount of intercompany profit subject to elimination is calculated on the basis of the buyer's affiliate's gross profit rate stated as a percentage of cost. S2: Intercompany sales of inventory necessitate adjustments to the calculation of the distribution of income to the controlling interest. O Only S1 is correct. O Only S2 is correct. O Both statements are correct. O Both statements are incorrect.arrow_forwardWhen a subsidiary sells inventory to a parent, the intra-entity profit is removed from the subsidiary’s net income for consolidation and reduces the income allocation to the noncontrolling interest. Is the profit permanently eliminated from the noncontrolling interest, or is it merely shifted from one period to the next? Explain.arrow_forwardIn situations where there are routine inventory sales between parent companiesand subsidiaries, when preparing the consolidation statements, which of thefollowing line item is indifferent to the sales being either upstream ordownstream? A. Consolidated retained earningsB. Non-controlling Interest expenseC. Consolidated gross profitsD. Consolidated net incomearrow_forward
- Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required subsequently to recognize profits.arrow_forwardWhat is a good response to? The unrealized intercompany profits can assuredly have an impact on the consolidated financial statements, as true profits and losses will not be recognized until inventory is sold to an unrelated entity. Prior to this third-party sale the intercompany profit or loss in unrealized and must be removed from the reports consolidation to avoid overstating the consolidated net income (Hoyle, Schaefer, & Doupnik, 2024). It is also important to determine if the inventory sale was upstream or downstream, as the considerations will vary based on the sale in relation to the parent company. For an upstream sale (subsidiary to parent company) any unrealized profit or loss can be partially allocated to non-controlling interests assuming such entities exist, and once the inventory has been resold the recognized revenue is subsequently split accordingly. During a downstream sale (parent to subsidiary company) the unrealized revenue is allocated to the parent company,…arrow_forwardThe consolidation procedures for intercompany sales are similar for upstream and downstreams sales a. Under a periodic inventory system but not under a perpetual inventory system b. If the merchandise is transferred at cost c. If the merchandise is immediately sold to outside parties d. When the subsidiary is 100% owned. Sales from one subsidiary to another are called a. Downstream sales b. Inter subsidiary sales c. Horizontal sales d. Upstream sales Non-controlling interest in consolidated income is never affected by a. Sale of Parent to unaffiliated company b. Downstream sales c. Upstream Sales d. Non-controlling interest is affected by all salesarrow_forward
- Starting from the separate cost of goods sold of the affiliates, the consolidatedcost of goods sold will be affectedby all of the following, except: a.Realized profit on beginning inventoryb.Excess of inventory FV over BV of the subsidiary at the date of acquisitionc.Amortization of the excess of inventory FV over BV of the subsidiaryd. Unrealized profit on ending inventoryarrow_forwardWhich of the following items shall be cancelled on consolidation? a. Receivables related to intra-group sales b. Payables related to intra-group purchases c. Unrealised profit on intra-group transactions d. Loans related to intra-group lending e. All of the abovearrow_forwardStarting from the separate cost of goods sold of the affiliates, the consolidated cost ofgoods sold will be affectedby all of the following, except: A.Excess of inventory FV over BV of the subsidiary at the date of acquisitionB.Unrealized profit on ending inventoryC.Realized profit on beginning inventoryD.Amortization of the excess of inventory FV over BV of the subsidiaryarrow_forward
- General Accountingarrow_forwardStatement 1: Consolidated inventory on the statement of financial position is recorded at fair market value to the affiliated group. Statement 2: If the intercompany seller is the subsidiary, it is the subsidiary's income that needs adjustment. Which statement/s is TRUE?arrow_forwardWhich of the following accounting treatments for costs related to business combination is incorrect? Group of answer choices a. Acquisition related costs such as finder’s fees; advisory, legal, accounting, valuation and other professional and consulting fees; and general administrative costs, including the costs of maintain an internal acquisitions department shall be recognized as expense in the Profit/Loss in the periods in which the costs are incurred. b. The costs related to issuance of financial liability at fair value through profit or loss shall be recognized as expense while those related to issuance of financial liability at amortized cost shall be recognized as deduction from the book value of financial liability or treated as discount on financial liability to be amortized using effective interest method. c. The costs related to the organization of the newly formed corporation also known as pre-incorporation costs shall be capitalized as goodwill or deduction from…arrow_forward
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