Q1. Perkins Company owns 85% of Sheraton Company. Perkins Company sells merchandise to Sheraton Company at 20% above cost (gross profit). During 2011 and 2012, such sales amounted to $400,000 and $500,000, respectively. At the end of each year, Sheraton Company had sold all of inventory purchased from Perkins to third parties. Calculate the amount of unrealized inventory profit for 2011 and 2012?
a. $400,000 for 2011 and $500,000 for 2012
b. $80,000 for 2011 and $100,000 for 2012
c. $0 for 2011 and $100,000 for 2012
d. $80,000 for 2011 and $0 for 2012
e. $0 for 2011 and $0 for 2012
Q2. Perkins Company owns 85% of Sheraton Company. Perkins Company sells merchandise to Sheraton Company at 20% above cost (gross profit). During 2011 and 2012, such sales amounted to $400,000 and $500,000, respectively. At the end of each year, Sheraton Company had sold 50% of inventory purchased from Perkins to third parties. Calculate the amount of intercompany sales that need to be eliminated in 2011 and 2012?
a. $400,000 for 2011 and $500,000 for 2012
b. $80,000 for 2011 and $100,000 for 2012
c. $0 for 2011 and $0 for 2012
Q3. What would be the workpaper entry to eliminate intercompany interest previously recorded?
a. Dr. Interest Income / Cr. Interest Expense
b. Dr. Interest Expense / Cr. Interest Income
Q4. Revenue on sales between affiliated companies cannot be recognized until merchandise is sold outside of the consolidated entity, even if control is not present.
a. True
b. False
Q5. The workpaper entry to eliminate intercompany sale of inventory is to Debit Sales and Credit Inventory:
a. True
b. False
Q6. In the process of eliminating intercompany sales of inventory, as a working paper entry, we debit Sales and credit COGS (cost of inventory) and Inventory (intercompany unrealized gross profit):
a. True
b. False
Q7. Unrealized inventory profit needs to be readjusted to COGS, if one of the intercompany sales of inventory have not been sold to 3rd parties.
a. True
b. False