Intercompany Transactions & Balances pg 105

Question 1

Downstream Transaction (pg 110)

Answer 1

When parent sells to subsidiary (Intercompany profit results from sale will be on books of parent)

Question 2

Upstream Transaction

Answer 2

When Subsidiary sells to parent (Intercompany profit results from sale will be on books of subsidiary)

Question 3

Accounts Affected by Intercompany Inventory Transactions

Answer 3

1. Sales/COGS (overstated)
2. Inventory accts (any intercompany profit (Loss) in End Inventory of buying affiliate overstates (understates) CV of Inv for consolidated purposes)

Question 4

Accounts Affect by Intercompany Fixed Asset Transactions

Answer 4

1. Fixed Assets
2. Accumulated Depreciation
3. Depreciation Exp/ Accumulated Depreciation

Question 5

Accounts Affected by Intercompany Bond Transactions

Answer 5

1. Bonds Payable
2. Premium/Discount on Bonds Payable
   > Premium=Gain on constructive retirement
   > Discount=Loss on constructive retirement
3. Investment in Bonds
4. Premium/Discount on Investment in Bonds
   > Premium=Loss on constructive retirement
   > Discount=Gain on constructive retirement
5. Interest Income/Interest Expense
6. Interest Receivable/Interest Payable

Question 6

COMBINED FS (NOT CONSOLIDATED)

Answer 6

-When there’s not parent and combined FS are more meaningful than separate FS
-Appropriate When:
> Common Control (one individual NOT
CORPORATION owns controlling interest in two or
more businesses that have related operations)
> Common Mgmt (Two or more businesses are under
common mgmt)
> Unconsolidated Subsidiaries (Parent lacks effective
control over two or more subsidiaries for which
wishes to show summary results)

Question 7

Process of COMBINING FS

Answer 7

-Similar to consolidating: Eliminate
1. Intercompany Receivables & Payables
2.Intercompany Revenues & Expenses
3.Intercompany Gains & Losses
4.Intercompany ownership & related equity::CV of
investment in company to be combined is eliminated
against equial amt of equity of that company THUS no
differences b/w debit & credit to be allocated

**UNLIKE consolidated FS results of combine FS DO NOT represent financial position, results of operations, cash flows of single controlling entity, BUT RATHER show aggregate results of combined companies after eliminating intercomapnay acct activity & balances