BU487 Chapter Notes - Chapter 6: Equity Method, Matching Principle, Retained Earnings
Document Summary
Intercompany profits in inventory: elimination entry to eliminate unrealized gross profit in ending inventory: Xxx (this restores inventory to its original cost: elimination entry for prepaid tax on the unrealized profit: Xxx (the tax expense has been reduced to match reduced income) In the first year: cogs is increased, ending inventory is decreased, profit is held back until realized through a sale to an outsider, deferred tax asset is established. In the second year: cogs is decreased as beginning inventory is decreased to original cost, profit is now realized, income tax expense is increased. Intercompany inventory profits upstream : example: parent"s inventory contains ,000 of items purchased from the. Tax is reported at the individual company level. Income tax is expensed in the same period as the profit. This creates a temporary difference and causes deferred income taxes. Intercompany inventory profit upstream transaction example: intercompany transactions: Closing inventory sub selling @ profit: xxx.
