Distinguish between an upstream sale of inventory and a
downstream sale. Why is it important to know whether a sale is
upstream or downstream?
How do unrealized intercompany inventory profits from a prior
period affect the computation of consolidated net income when the
inventory is resold in the current period? Is it important to know
whether the sale was upstream or downstream? Why or why not?
How will the elimination of unrealized intercompany inventory
profits recorded on the subsidiary’s books affect consolidated
A parent company may use on its books one of several methods
of accounting for its ownership of a subsidiary: (a) cost method,
(b) modified cost method, or (c) fully adjusted equity method. How
will the choice of method affect the reported balance in the
investment account when there are unrealized intercompany profits
on the parent’s books at the end of the period?
If a company sells a depreciable asset to its subsidiary at a
profit on December 31, 20X3, what account balances must be
eliminated or adjusted in preparing the consolidated income
statement for 20X3? If the sale instead occurred on January 1,
20X3, what additional account(s) will require adjustment in
preparing the consolidated income statement?
How are unrealized profits treated in the consolidated income
statement if the intercompany sale occurred in a prior period and
the transferred item is sold to a nonaffiliate in the current
When a parent company sells land to a subsidiary at more than
book value, the consolidation entries at the end of the period
include a debit to the gain on the sale of land. When a parent
purchases the bonds of a subsidiary from a nonaffiliate at less
than book value, the consolidation entries at the end of the period
contain a credit to a gain on bond retirement. Why are these two
situations not handled in the same manner on the consolidation
When a parent company purchases a subsidiary’s bonds from a
nonaffiliate for more than book value, what income statement
accounts will be affected in preparing the consolidated financial
statements? What will be the effect on income assigned to the
controlling interest in the consolidated income statement?
How would the relationship between interest income recorded
by a subsidiary and interest expense recorded by the parent be
expected to change when comparing a direct placement of the
parent’s bonds with the subsidiary to a constructive retirement in
which the subsidiary purchases the bonds of the parent from a
A subsidiary purchased bonds of its parent company from a
nonaffiliate in the preceding period and a gain on bond retirement
was reported in the consolidated income statement as a result of
the purchase. What effect will that event have on the amount of
consolidated net income and income to the noncontrolling interest
reported in the current period?