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CH6 Solutions - CHAPTER 6 Note The letter A indicated for a...

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CHAPTER 6 Note: The letter A indicated for a question, exercise, or problem means that the question, exercise, or problem relates to the chapter appendix. ANSWERS TO QUESTIONS 1. No. If all of the merchandise sold by one affiliate to another has subsequently been sold to outsiders, the only effect that the elimination of intercompany sales of merchandise will have on the consolidated financial statements is to reduce consolidated sales and consolidated cost of sales by an equal amount. Consolidated net income will be unaffected. 2. The effect of eliminating profit on intercompany sales after deducting selling and administrative expenses rather than gross profit is to include selling and administrative expenses associated with the intercompany sale in consolidated inventories. Support for the gross profit approach is based on the proposition that consolidated inventory balances should include manufacturing costs only and that generally accepted accounting standards normally preclude the capitalization of selling and administrative costs. 3. $10,000 in intercompany profit should be eliminated on the consolidated statements workpaper ($60,000 – 2 000 100 , $ = $10,000). After this elimination the merchandise will be included in the consolidated statements at its cost to the affiliated group of $50,000 ( 2 000 100 , $ ). 4. Yes. Although 100 percent elimination of intercompany profit has long been required in the preparation of consolidated financial statements, the adjustments to the noncontrolling interest described in this text were discretionary prior to the current standard. The FASB requires that these adjustments be allocated between the noncontrolling and controlling interests. 5. When the subsidiary is the intercompany seller, the unrealized profit is shown in the accounts of the sub (S Company). These accounts provide the starting point for the calculation of the noncontrolling share of current year earnings. Failure to eliminate unrealized profit would result in the overstatement of the noncontrolling share in profits. However, when the parent is the intercompany seller, the unrealized profit is shown in the accounts of the parent (P Company). Since the noncontrolling interest does not share in the earnings of P Company, the noncontrolling interest is not affected by the unrealized profit therein. 6. Noncontrolling interest in consolidated net assets at the beginning of the year is adjusted by debiting or crediting the subsidiary’s beginning retained earnings in the consolidated statements workpaper. 7. The only procedural difference in the workpaper entries relating to the elimination of intercompany profits when the selling affiliate is a less than wholly owned subsidiary is that the noncontrolling interest in the amount of intercompany profit in beginning inventory must be recognized by debiting or crediting the noncontrolling shareholders’ percentage interest in such adjustments to the beginning retained earnings of the subsidiary.
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