19A2 - Advanced Fin. Acc. - Intercompany Profit Transaction

Moy, Inc., owns 80 percent of Gio, Inc. During 2011, Moy sold goods with a 40 percent gross profit to Gio. Gio sold all of these goods in 2011. For 2011 consolidated financial statements, how should the summation of Moy and Gio income statement items be adjusted?

• Sales and cost of goods sold should be reduced by the intercompany sales.

• Sales and cost of goods sold should be reduced by 80 percent of the intercompany sales.

• Net income should be reduced by 80 percent of the gross profit on intercompany sales.

• No adjustment is necessary.

The material sale of inventory items by a parent company to an affiliated company:

• enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining.

• affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.

• does not result in consolidated income until the merchandise is sold to outside parties.

• does not require a working paper adjustment if the merchandise was transferred at cost.

Intercompany sales of nondepreciable fixed assets in year of intercompany sale:

• defer any gain or loss.

• recognize the previously deferred gain or loss.

• adjust investment account.

• None of the above.

Intercompany sales of non depreciable fixed assets in years of continued ownership adjust (a)   account to defer gain or loss.

When there are (a)   of inventory during the year and a three-part consolidation workpaper is prepared, elimination entries related to the intercompany sales always are needed.