QUESTIONS:
1. The elimination of the intercompany sales of merchandise does affect the amount of reported consolidated income. This is because the sales are eliminated from the intercompany financial statements to eliminate the double accounting of recording sales and profits twice. Consolidated net income will be unaffected.
2. The effect of eliminating profit on intercompany sales after deducting selling and administrative expenses rather than gross profit is to include selling and administrative expenses associated with the intercompany sale in consolidated inventories. Support for the gross profit approach is based on the proposition that consolidated inventory balances should include manufacturing costs only and that generally accepted accounting standards normally preclude the capitalization of selling and administrative costs.
3. When the subsidiary is the intercompany seller, the unrealized profit is shown in the accounts of the S Company. These accounts provide the starting point for the calculation of the non-controlling share of current year earnings. If the unrealized profit are not eliminated it would result in the overstatement of the non-controlling share in profits. On the other hand, when the parent is the intercompany seller, the unrealized profit is shown in the accounts of the parent company. Since the non-controlling interest does not share in the earnings of P Co., the non-controlling interest is not affected by the unrealized profit therein.
4. The only procedural difference in the work paper entries relating to the elimination of intercompany profits when the selling affiliate is a less than wholly owned subsidiary is that the non-controlling interest in the amount of intercompany profit in beginning inventory must be recognized by debiting or crediting the non-controlling shareholders’ percentage interest in such adjustments to the