Solution Manual Advanced Accounting 12e Beams Ch 5
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Advanced Accounting (AKK301)
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Airlangga University
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Advanced Accounting
Solution manual for questions, exercises, and problems of Advanced Accounting 12e by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Kenneth A. Smith.
Test Bank - Advanced Accounting 13th Edition by Floyd Beams All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank - Advanced Accounting 13th Edition by Floyd Beams, All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank for Advanced Accounting 13th Edition by Floyd Beams, Joseph Anthony, Bruce Bettinghaus, Kenneth Smith, All Chapters |Complete Guide A+
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Chapter 5
INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES
Answers to Questions
1 Intercompany transactions between parent and subsidiary should be eliminated in preparing consolidated financial
statement because from the point of view of the consolidated entities, the entities are a single economic entity. The
intercompany transactions thus become intracompany transactions. Intracompany transactions are never recorded for
the purpose of external accounting report.
2 Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits
according to GAAP.
3 The unrealized profit and or loss should be realized when the merchandise has been sold to third party. This is also
when the revenue is recognized for the consolidated entity.
4 The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal
amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The
importance of the elimination lies in a correct statement of consolidated sales and cost of sales.
5 Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts
payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the
computation "current assets less current liabilities" is nil.
6 Upstream sales are sales from subsidiary to parent. Downstream sales are sales from parent to subsidiary. The
importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit
or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent-
seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the
parent and noncontrolling interest in relation to their proportionate holdings.
7 Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated in 2011. The
ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the
beginning inventory will understate consolidated net income in 2012. The analysis of the effect of unrealized
inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like
inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods.
Consolidated net income for 2013 is unaffected.
8 There are 2 directions of intercompany inventory sale transactions. The first transaction is sale from a parent to a
subsidiary, which is a downstream sale. The second transaction, upstream sale is a sale from a subsidiary to a parent.
In a downstream sale, the unrealized profit from the transaction is included in the parent’s separate income.
Conversely in an upstream sale, the unrealized profit from the transaction is included in the subsidiary’s separate
income. Since the noncontrolling interest share is depending on the subsidiary’s separate income, the unrealized
profit in an upstream sale should be allocated to the noncontrolling interest, but not in a downstream stream.
Therefore the directions of intercompany inventory transactions will not affect the intercompany unrealized profit
allocation when there is no noncontrolling interest. This condition exists when the parent own the subsidiary 100
percent.
9 A parent's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to
subsidiaries in accordance with the one-line consolidation concept. The parent reduces its investment and investment
income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are
sold to outside parties by the subsidiary, the profits of the parent are realized and the parent increases its investment
and investment income accounts.
10 Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and
understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the
beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending
inventory increases (debits) cost of goods sold.
11 The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest
or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is
eliminated from consolidated cost of goods sold.
12 Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by
reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and
the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the
noncontrolling interest and the investment account are debited proportionately.
13 There are two equally good approaches for computing noncontrolling interest share when there are unrealized profits
from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the
subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting
unrealized profits in the ending inventory. The noncontrolling interest share is then equal to the realized income of
the subsidiary multiplied by the noncontrolling interest percentage.
The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income,
in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest
share is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning
inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest
percentage relating to the unrealized profits in the ending inventory.
14 The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience,
but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any
statement date are correctly determined. This is because any unrealized profits in beginning inventory that are
considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending
inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same
amount. Thus, the workpaper effects are offsetting as illustrated in the following workpaper entries, which assume
$5,000 unrealized profits from downstream sales.
Investment in subsidiary 5,000
Cost of sales 5,000
To eliminate unrealized profit in beginning inventory.
Cost of sales 5,000
Inventory 5,000
To eliminate unrealized profit in ending inventory.
2 c
Unrealized profits from intercompany sales with Ken are eliminated from the
ending inventory: $960,000 combined current assets less $36,000 unrealized
profit ($180,000´ 20%).
3 c
Combined cost of sales of $2,250,0000 less $750,000 intercompany sales
Solution 5-3
1 d
Pil's separate income (in thousands) $2,000
Add: Share of Sil's income ($1,000 ´ 100%) 1,000
Add: Realization of profit deferred in 2011
$3,000 - ($3,000/150%) 1,000
Less: Unrealized profit in 2012 inventory
$2,400 - ($2,400/150%) (800)
Controlling share of consolidated net income $3,200
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