When beginning and ending inventories include merchandise purchased from the gro

Question

When beginning and ending inventories include merchandise purchased from the gross profit on that merchandise treated in an affilated company, how is the seller's income distribution schedule? Deducted from income Deducted from income Added to income Added to income a. Added to income Deducted from income Added to income Deducted from income b. c. d. 33. Which of the following is false about intercompany transactions? a. Intercompany transactions have to be eliminated in the consolidation worksheet. b. Every year in the consolidation worksheet, we need to eliminate all intercompany sales of merchandise that occurred since the parent acquired the subsidiary (i.e., all intercompany sales in the current and prior years). c. The profit resulting from intercompany sales of merchandise is considered unrealized until the merchandise is sold to outsiders All of these statements are true. d. Which of the following is true about notes payable issued from a subsidiary to the parent company (i.e intercompany debt)? 34. In the consolidation worksheet, the note payable, note receivable, interest expense, and interest income related to intercompany debt must be eliminated. a. b. If the note is discounted at an outsider entity (e-g, bank), then the note payable and interest expense c. d. should be reported on the consolidated financial statements. All of these statements are true. None of these statements is true.

Explanation / Answer

Q.32)ANSWER A

gross profit = sales + closing inventory-purchases-opening inventory

here income is generated through sales so we have to deduct opening inventory and add the closing inventory in the income statement

Q33) ANSWER D

intercompany transactions are transactions that occur between the different units of same entity.it can be a transaction from a parent company to its subsidiary company and vice versa. intercompany transactions get eliminated before they enter the consolidation statement,they get cancelled as debit credit and the same happens with the sales/revenue earned by any subsidiary company after being acquired by the holding/parent company gets cancelled too as per the double entry principle of accounting.the profit arising through the inter company transaction are unrealised till the time they are acquired by the third party,this unconfirmed profit from inter company transfer is referred to as unrealized intercompany profit.

Q34) ANSWER C

notes /bills which are drawn by one company and accepted by the other withing the group(inter company) are shown as notes payable in the liabilty side and notes recievable in the asset side which is a contra entry and so get eliminated while preparing consolidated statements.but,if the note is endorsed or discounted by the bank,the same must be shown in the liabilty side of the statements since the accepting company will have to pay the note at maturity.the statements should include a note as a contingent liabilty in the balance sheet.so here bith the statements are true.

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