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Advanced Ch 7 - 7 GeneralOverview 0 ,eliminatingentries 1

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Intercompany Inventory Transactions 7 General Overview 0. When there have been intercompany inventory transactions, eliminating entries  are needed to remove the revenue and expenses related to the intercompany  transfers recorded by the individual companies 1. The eliminations ensure that only the cost of the inventory to the consolidated  entity is included in the consolidated balance sheet when the inventory is still on  hand and is charged to cost of goods sold in the period the inventory is resold to  nonaffiliates 2. Transfers at cost 0. The balance sheet inventory amounts at the end of the period require no  adjustment for consolidation because the purchasing affiliate’s inventory  carrying amount is the same as the cost to the transferring affiliate and the  consolidated entity 1. When inventory is resold to a nonaffiliate, the amount recognized as cost  of goods sold by the affiliate making the outside sale is the cost to the  consolidated entity 2. An eliminating entry is needed to remove both the revenue from the  intercorporate sale and the related cost of goods sold recorded by the seller 3. Consolidated net income is not affected by the eliminating entry 3. Transfers at a profit or loss 4. Companies use different approaches in setting intercorporate transfer  prices 5. The elimination process must remove the effects of such sales from the  consolidated statements 6. The workpaper eliminations needed for consolidation in the period of  transfer must adjust accounts in: 0. Consolidated income statement: Sales and cost of goods sold 1. Consolidated balance sheet: Inventory 7. The resulting financial statements appear as if the intercompany transfer  had not occurred 4. Effect of type of inventory system 8. Most companies use either a perpetual or a periodic inventory control  system to keep track of inventory and cost of goods sold 9. The choice between these inventory systems results in different entries on  the books of the individual companies and, therefore, slightly different 
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workpaper eliminating entries in preparing consolidated financial  statements Downstream Sale of Inventory 0. For consolidation purposes, profits recorded on an intercorporate inventory sale are  recognized in the period in which the inventory is resold to an unrelated party 0. Until the point of resale, all intercorporate profits must be deferred 1. When a company sells an inventory item to an affiliate, one of three situations  results: 0. The item is resold to a nonaffiliate during the same period 1. The item is resold to a nonaffiliate during the next period 2.
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