1.

Why do we eliminate the intra-group sales and purchases of merchandise

when preparing consolidated income statement?
Intercompany inventory transactions must be eliminated when preparing
consolidated income statement to ensure that only the historical cost of the
inventory to the consolidated entity is included in the consolidated Statement of
financial position when the inventory is still on hand and is charged to cost of goods
sold in the period the inventory is resold to outsiders. Also, the direction of the
sale determines which shareholder group absorbs the elimination of
unrealized intercompany gains and losses.

2. When will the intra-group sale or purchase of merchandise result into an

unrealized profit or loss?
Profit or loss from selling an item to a related party normally is considered realized
at the time of the sale from the selling companys perspective, but the profit is not
considered realized for consolidation purposes until resold to an unrelated party.
This unconfirmed profit from an intercorporate transfer is referred to as unrealized
intercompany profit.

3. When is it possible for profit to be totally realized in an intercompany

sale/purchase of merchandise made between affiliated companies?.
Gains are considered realized by the affiliated companies when sale is made to an
external party. Profits recorded on an intercompany inventory sale are realized in
the period in which the inventory is resold to outsiders.
4. Explain the difference between downstream sale and upstream sale and why
it is important to identify this in preparing consolidated financial statements?
When a sale is from a parent to a subsidiary, referred to as a downstream sale,
any gain or loss on the transfer accrues to the stockholders of the parent company.
While, a sale is from a subsidiary to its parent, an upstream sale, any gain or loss
accrues to the stockholders of the subsidiary.
It is important to identify this in preparing consolidated financial statements
If the subsidiary is wholly owned, all the gain or loss ultimately accrues to the
parent company as the sole stockholder.
If, however, the selling subsidiary is not wholly owned, the gain or loss on the
upstream sale is apportioned between the parent company and the noncontrolling
shareholders.

5. What Is the financial reporting standard applicable for non-depreciable assets

acquired in an inter-company sale between affiliates when presenting this in
the consolidated financial statements?
For consolidation purposes, the transaction is considered more than an internal
transfer:
a) No profit should be recognized by the seller-affiliate until the asset has been sold
to an outside party
b) The property should be restored to its original cost
6. Explain when gains or losses from intercompany sale of depreciable assets
may be realized by the selling affiliate
Unrealized intercompany profits on a depreciable or amortizable asset are viewed
as being realized gradually over the remaining economic life of the asset as it is
used by the purchasing affiliate in generating revenue from unaffiliated parties.
In effect, a portion of the unrealized gain or loss is realized each period as benefits
are derived from the asset and its service potential expires.

7. The subsidiarys beg. Inventory includes P24,000 and its ending inv. includes
1/5 of the P48,ooo coming from merchandise purchased from the patent. Give
the entry that parent will record in its book using the equity method.
-----------8. Refer to no. 7. Give the adjusting and eliminating entry
____________
9. An upstream sale of non-depreciable asset at gain of P50,000 was recorded
middle of the year by the parent. This asset is needed by the subsidiary in its
operation. Give the entry to be recorded in the books of the parent and in the
working paper on the year of sale and one year after the sale.
_________________
10.Give the pro-forma adjustment and elimination entry that must be prepared
in the year of sale and loss one year after when there is an intercompany sale
of depreciable asset at a loss. Book Value of the asset was P240,000 half
depreciated and sold for P100,000 to subsidiary. It has remaining life of 5
years from the date of the sale.
______________________

11.Is there any difference between the adjustment and elimination entries
prepared under the equity method and cost method?

In equity method, the subsiarys cost of sales and parents cost of sales
representing the unsold merchandise should be eliminated. In parent book the
mark-up on the unsold merchandise should be eliminated
Under the cost method, the entries for the intercompany sale and purchase will
practically be the same in the books of affiliates. The only difference will be in the
recording of income from subsidiary which will only be made upon receipt of
dividend and credited to the title Dividend Income
12.What is a piece meal realization? Why is it not possible to recognize this in an
intercompany sale of merchandise or non-depreciable asset?
Unrealized gains and losses from intercompany sales of depreciable assets are realized through use if the
assets are held within the consolidated entity and through sale if the assets are sold to outside parties. The
process of recognizing previously unrealized gains and losses through use is a piecemeal recognition over
the remaining use life of the depreciable asset.