Final Exam Review

Question 1

What are intercompany transactions?

Answer 1

When parent and subsidiaries have sales and purchase transactions between each other, or other transactions such as intracompany rent, management fees, and interest.

Question 2

Why are intracompany transactions eliminated?

Answer 2

All intracompany transactions are eliminated so that the financial statements reflect only the result of the transactions outside the group of companies.

Question 3

What are the three things that happen to intercompany transactions in the consolidated financial statements?

Answer 3

1) all intracompany sales must be eliminated against the related purchase or intracompany expense.

2) all intracompany balances are eliminated against each other.

3) income should be recognized only when it is earned in a transaction with an outsider.

Question 4

What is unrealized profit?

Answer 4

When one affiliated company sells assets to another affiliated company, it is possible that the profit or loss recorded on the transaction has not been realized from the point of view of the consolidated entity.

Question 5

What are the three types of unrealized intracompany profits that are eliminated?

Answer 5

1) Profits in inventory
2) Profits in non-depreciable assets
3) Profits in depreciable assets

Question 6

What is a downstream transaction?

Answer 6

Is when the parent sells to its subsidiary.

Non-controlling interest is not affected by intracompany profits made on downstream transactions.

Question 7

What is an upstream transaction?

Answer 7

Is when the subsidiary sells to the parent or another subsidiary of the parent.

Non-controlling interest is affected and will share in intracompany profits made on upstream transactions.

Question 8

Why is unrealized profit eliminated from inventory?

Answer 8

the unrealized profit is deducted from the inventory to bring inventory back to its original cost in accordance with the historical cost principle.

Question 9

Why does intracompany accounts receivable and payable have to be eliminated?

Answer 9

All transactions between the parent and its subsidiaries, or between the subsidiaries for a parent, must be eliminated in the consolidation process to reflect this single-entity concept.

Question 10

What happens if impairment is present or not present on a loss of an asset?

Answer 10

1) If impairment is present the asset should be written down to its net realizable value.

2) if impairment is not present and the loss does not reflect fair value, the loss should be eliminated.