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Unformatted text preview: CHAPTER 6 INTERCORPORATE TRANSFERS OF SERVICES AND NONCURRENT ASSETS ANSWERS TO QUESTIONS Q6-1 Profits on intercorporate sales generally are considered to be realized when the affiliate that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset. Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary. Q6-3 If the purchaser records the services received as an expense, both revenues and expenses will be overstated in the consolidated income statement in the period in which the intercorporate services are provided. In the event the services are capitalized by the purchaser, the cost of the asset will be overstated, depreciation expense and accumulated depreciation will be overstated if the services are assigned to a depreciable asset, and service revenue will be overstated. Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net income of the seller. (b) All unrealized profit on current-period intercorporate sales must be excluded from consolidated net income until realized through resale to a nonaffiliate. Q6-5 Profits on intercompany sales are included in consolidated net income in the period in which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period. Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared. There should be no income statement effect for the current period. Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company. Solutions Manual – Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e 6 - 1 Chapter 6 Q6-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated....
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