Chapter 7, Problem 7.1Q

To determine

Concept Introduction:

The intercompany transactions occur when the unit of legal entity is having transactions with another unit of the similar entity. This transaction can be divided into two categories such as direct and indirect intercompany transfer. The direct transfer occurs when there is transfer between the different units of the same entity and indirect transfer occurs when the unit of entity acquires debt or assets issued to unrelated entity through another unit of the same entity. This type of transfer will help the entity in improving the flow of finance and asset in efficient manner.

:

The realization of profit on intercompany sales.

Answer to Problem 7.1Q

The profit on intercompany sales generally are considered to be realized when the entity that has purchased the item sells it outside the group entity. The depreciable item are used by the entity in its operations then the profits are considered to be realized when the purchaser depreciates the assets.

Explanation of Solution

The unrealized profit on the intercompany sale to parties outside the group entity is considered, realized and recorded in the consolidated balance sheet of the entity. The profit on the intercompany sale of the asset is realized after the adjustment of the depreciation of asset, i.e., the gain is realized by way of usage and should be recognized in the consolidated balance sheet after adjusting the value of depreciation on asset. Thus, the profit on intercompany sales generally are considered to be realized when the entity that has purchased the item sells it to outside the group entity. The depreciable item are used by the entity in its operations then the profits are considered to be realized when the purchaser depreciates the assets.