ABCO Corporation Has Its Two Wholly Owned Subsidiaries, Delta and Parry

question 38

Multiple Choice

ABCO Corporation has its two wholly owned subsidiaries, Delta and Parry, in Country A and Country B, respectively. Parry purchases a part for its production from Delta. Country B has a higher tax rate than Country A. To minimize the corporation's overall income tax, how should ABCO set its transfer prices between its subsidiaries?

• A) Delta should sell parts to Parry at low prices.
• B) Delta should sell parts to Parry at high prices.
• C) It doesn't matter what transfer price is used because the subsidiaries are part of the same company.
• D) Transfer pricing does not affect the total tax paid by the corporation.

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Definitions:

Straight-Line Method

A depreciation method where the same amount of depreciation expense is allocated evenly over the useful life of an asset.

Interest Method

A technique used in accounting and finance to calculate the interest income or expense on bonds and loans over their life.

Unamortized Premium

The portion of the bond premium that has not yet been amortized or allocated as an expense over the bond's life.

Straight-Line Method

A depreciation method that allocates an equal portion of the initial cost of an asset to each accounting period over its useful life.