Chapter 6: Intercompany Inventory Transactions

Question 1

Using gross profit percentage to estimate unrealized profit on intercompany transfers

Answer 1

If selling company uses constant markup percentage on all intercompany transfers

Total intercompany sales - COGS = intercompany gross profit

Gross profit/ sales = gross profit percentage
Gross profit % * inventory on hand = UNREALIZED GROSS PROFIT (must be deferred)

Question 2

Parent’s equity method entries for unrealized gross profit

Answer 2

to deferr
DR income from subsidiary
CR investment in subsidiary
(decreases both)

When gross profit is realized the entry is simply reversed)