Sally Corporation, an 80%-Owned Subsidiary of Reynolds Company, Buys Half

question 9

Multiple Choice

Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds.The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers.In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation,

• A)​the intercompany transactions can be ignored because the transfer price represents arm's length bargaining.
• B)​any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory.
• C)​any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety.
• D)​eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated.