Which Statement Is True Concerning Unrecognized Profits in Intra-Entity Inventory

question 49

Multiple Choice

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

• A) The investor and investee make reciprocal entries to defer and recognize inventory profits.
• B) The same adjustments are made for upstream and downstream sales.
• C) Different adjustments are made for upstream and downstream sales.
• D) No adjustments are necessary.
• E) Adjustments will be made only when profits are known upon sale to outsiders.

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Definitions:

Closing Entries

Journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, effectively resetting the temporary accounts for the next period.

Accounting Cycle

The collective process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation in the financial statements.

Beginning Assets

Beginning assets refer to the value of all assets owned by a company at the start of an accounting period, encompassing resources like cash, inventory, and property.

Ending Liabilities

The total debts and financial obligations a company owes at the end of a reporting period.