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CH7 Solutions - Copy

CH7 Solutions - Copy - CHAPTER 7 Note The letter A...

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CHAPTER 7 Note: The letter A indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1. Intercompany profit in depreciable asset transfers is realized as a result of the utilization of the asset in the generation of revenue. Such utilization is measured by depreciation and, accordingly, the recognition of the realization of intercompany profit is accomplished through depreciation adjustments in the periods following the intercompany transfers. When intercompany sales involve nondepreciable assets, any profit recognized by the selling affiliate will remain unrealized from the consolidated entity’s point of view for all subsequent periods or until the asset is disposed of. 2. Intercompany profit may be included in the selling affiliate’s carrying value of an asset that is sold to third parties. If the sales price in the sale to the third party is less that the inflated carrying value, the selling affiliate will recognize a loss on the sale. From the point of view of the consolidated entity, however, the carrying value of the asset is its cost to the affiliated group (selling affiliate’s cost less unrealized intercompany profit) and if this value is less than the selling price to the third party, the consolidated group will recognize a gain. In effect, previously unrecognized intercompany profit is realized upon the sale of the asset to a third party. 3. The only procedural difference in the workpaper entries relating to the elimination of unrealized intercompany profit in depreciable or nondepreciable assets when the selling affiliate is a less than wholly owned subsidiary is that the noncontrolling interest in the unrealized intercompany profit at the beginning of the year must be recognized by debiting or crediting the noncontrolling shareholders’ percentage interest in such adjustments to the beginning retained earnings of the subsidiary. 4. Consolidated income is equal to the parent company’s income from its independent operations that has been realized in transactions with third parties plus subsidiary income that has been realized in transactions with third parties and adjusted for the amortization, depreciation, or impairment of the differences between implied and book values (this total is then allocated to the controlling and noncontrolling interests). The controlling interest in consolidated income is equal to the parent company’s income from its independent operations that has been realized in transactions with third parties plus its share of subsidiary income that has been realized in transactions with third parties and adjusted for the amortization, depreciation, or impairment of the differences between implied and book values.
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