Which of the Following Statements Is True Regarding Inventory Transfers

question 54

Multiple Choice

Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method?

• A) The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers.
• B) Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intra-entity transactions unsold at year-end may not be sold in the next year.
• C) Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intra-entity transactions unsold at year-end may not be sold in the next year.
• D) Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price.
• E) Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits.

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