During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The
ID: 2524832 • Letter: D
Question
During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000 intra-entity gross profit recognized?
When goods are transferred to a third party by Lord.
When Lord pays Von for the goods.
When Von sold the goods to Lord.
When Lord receives the goods.
No gain can be recognized since the transfer was between related parties.
When goods are transferred to a third party by Lord.
When Lord pays Von for the goods.
When Von sold the goods to Lord.
When Lord receives the goods.
No gain can be recognized since the transfer was between related parties.
Explanation / Answer
Whenever a Corporation acquires majority of voting stock of other corporation, the parent is required to prepare consolidated financial statements as if the parent and the subsidary are a single economic entity. In such cases, since an entity cannot engage in business transactions with itself, adjustments are needed on the consolidation worksheet to eliminate the effect of intercompany transactions between the parent and the subsidary to remove the effect of inter company transactions and present financial statements as if such transactions has never occured.
The sale of inventory is an inter company transaction and has to be eliminated.
The answer is - No gain can be recognized since the transfer was between related parties.
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