Reference no: EM132458800

Question 1: Distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale is upstream or downstream?

Question 2: How do unrealized intercompany inventory profits from a prior period affect the computation of consolidated net income when the inventory is resold in the current period? Is it important to know whether the sale was upstream or downstream? Why or why not?

Question 3: How will the elimination of unrealized intercompany inventory profits recorded on the subsidiary's books affect consolidated retained earnings?

Question 4: A parent company may use on its books one of several methods of accounting for its ownership of a subsidiary: (a) cost method, (b) modified cost method, or (c) fully adjusted equity method. How will the choice of method affect the reported balance in the investment account when there are unrealized intercompany profits on the parent's books at the end of the period?

Question 5: If a company sells a depreciable asset to its subsidiary at a profit on December 31, 20X3, what account balances must be eliminated or adjusted in preparing the consolidated income statement for 20X3? If the sale instead occurred on January 1, 20X3, what additional account(s) will require adjustment in preparing the consolidated income statement?

Question 6: How are unrealized profits treated in the consolidated income statement if the intercompany sale occurred in a prior period and the transferred item is sold to a nonaffiliate in the current period?

Question 7: When a parent company sells land to a subsidiary at more than book value, the consolidation entries at the end of the period include a debit to the gain on the sale of land. When a parent purchases the bonds of a subsidiary from a nonaffiliate at less than book value, the consolidation entries at the end of the period contain a credit to a gain on bond retirement. Why are these two situations not handled in the same manner on the consolidation worksheet?

Question 8: When a parent company purchases a subsidiary's bonds from a nonaffiliate for more than book value, what income statement accounts will be affected in preparing the consolidated financial statements? What will be the effect on income assigned to the controlling interest in the consolidated income statement?

Question 9: How would the relationship between interest income recorded by a subsidiary and interest expense recorded by the parent be expected to change when comparing a direct placement of the parent's bonds with the subsidiary to a constructive retirement in which the subsidiary purchases the bonds of the parent from a nonaffiliate?

Question 10: A subsidiary purchased bonds of its parent company from a nonaffiliate in the preceding period and a gain on bond retirement was reported in the consolidated income statement as a result of the purchase. What effect will that event have on the amount of consolidated net income and income to the noncontrolling interest reported in the current period?