The sale of a significant amount of inventory by a parent company to its 100-per

Question

The sale of a significant amount of inventory by a parent company to its 100-percent owned subsidiary:

a. Is included in consolidated revenue only if the transfer was the result of an arm’s-length bargain.

b. Affects consolidated net income under the periodic inventory system, but not under the perpetual inventory system.

c. Does not increase consolidated net income until the inventory is sold to outside entities (entities not part of the consolidated group). d. Does not require an adjustment in consolidate if the inventory was sold at parent company’s cost.

Explanation / Answer

Solution:

The answer to the above question is -

c. Does not increase consolidated net income until the inventory is sold to outside entities.

Since, the merchandise is transferred, the transaction will not result in the income of the Company.

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