19A1 - Advanced Fin. Acc. - Intercompany Profit Transaction

Toy Corporation regularly sells inventory items to its subsidiary, Sun Corporation. If unrealized profits in Sun’s 2011 year-end inventory exceed the unrealized profits in its 2012 year-end inventory:

• Combined cost of sales will be greater than consolidated cost of sales in 2011.

• Combined cost of sales will be less than consolidated cost of sales in 2011.

• Combined gross profit will be greater than consolidated gross profit in 2011.

• Combined sales will be less than consolidated sales in 2011.

Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income:

• plus the unrealized profit on upstream intercompany sales of inventory made during the current year.

• plus the profit realized this year from upstream intercompany sales of inventory made last year.

• plus unrealized profit on downstream intercompany sales of inventory made during the current year.

• minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year.

Intercompany sales of non depreciable fixed assets in year of sale to outside entity:

• restate fixed asset to cost

• recognize the previously deferred gain or loss

• All of the above

• None of the above

Unrealized profit or loss on nondepreciable fixed assets recognize full (a)   upon resale to outside entity.

Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating all unrealized profit in (a)   intercompany inventory sales, and unrealized profit in upstream intercompany inventory sales made during the current year.