Deck 8: Introduction to Intercompany Transactions

Question 1

Inventory sales from a parent to one of its subsidiaries are called _______________ sales.

Answer 1

downstream

Question 2

Inventory sales from a subsidiary to its parent are called _______________________ sales.

Answer 2

upstream

Question 3

Intercompany transactions are usually recorded in ____________________________ accounts.

Answer 3

separate

Question 4

All intercompany transactions are __________________________________ transactions.

Question 5

Not all _______________________-party transactions are intercompany transactions.

Question 6

For income tax-reporting purposes, transfer prices for intercompany transactions must be ___________________________.

Question 7

Under Section 482 of the U.S. Internal Revenue Code, the pricing for related-party transactions must be at _________________________________.

Question 8

An intercompany transaction is an arm's-length transaction if the transfer price is the same price charged to a(n) __________________________ party.

Question 9

The IRS's 20% and 40% penalties for transfer pricing adjustments that exceed $10 and $20 million, respectively, are _______________________________________ for tax-reporting purposes.

Question 10

The concept of intercompany profit to be deferred for consolidated reporting purposes is that of __________________________ profit.

Question 11

When unrealized intercompany profit is deferred for consolidated reporting purposes, it is also necessary to defer any ___________________________________ that have been recorded on that profit.

Question 12

A method of preparing a consolidation worksheet that minimizes the number of elimination entries is called __________________________________________.

Question 13

Inventory sales from a parent to one of its subsidiaries are referred to as downstream sales.

Question 14

Under current GAAP, intercompany transactions are to be recorded in separate general ledger accounts.

Question 15

Under current GAAP, elimination by rearrangement is mandatory.

Question 16

For the income statement, reciprocal account balances do not exist for all types of intercompany transactions.

Question 17

The Intercompany Sales account is an example of an account that would always have a reciprocal balance.

Question 18

All intercompany transactions generally are related-party transactions.

Question 19

All related-party transactions are intercompany transactions.

Question 20

Intercompany transactions can occur between an investor company and a company in which the investor owns 25% of the investee's outstanding common stock.

Question 21

The term intercompany transaction generally is restricted to control situations.

Question 22

Intercompany transactions are eliminated in consolidation because they are related-party transactions.

Question 23

Under Section 482 of the U.S. Internal Revenue Code, the pricing of intercompany transactions must be at an arm's-length basis.

Question 24

Because all intercompany transactions are eliminated in consolidation, the use of improper or unfair transfer prices has no consequences for consolidated reporting purposes.

Question 25

Under Section 482 of the U.S. Internal Revenue Code, the details of transactions are ignored and taxable profit is determined by allocating shares of the total profit.

Question 26

The IRS's 20% penalty for transfer pricing adjustments during a year that exceed $10 million of taxable income are not tax deductible.

Question 27

_____ Intercompany inventory transfers cannot be

A) Bonafide transactions.
B) Arm's-length transactions.
C) Related-party transactions.
D) Negotiated transactions.
E) None of the above.

Question 28

_____ Which of the following statements is the correct reason for eliminating intercompany transactions for consolidated reporting purposes?

A) Intercompany transactions are related-party transactions.
B) From the perspective of either of the individual companies, intercompany transactions are not bonafide transactions.
C) It is often impractical and in many cases impossible to determine whether the transfer prices approximate prices that could have been obtained with outside, independent parties.
D) The parent company could manipulate the intercompany transfer prices in a manner that is not equitable to the subsidiary.
E) None of the above.

Question 29

_____ Which of the following statements is true?

A) All intercompany transactions are related-party transactions.
B) All related-party transactions are intercompany transactions.
C) An unsupportable, artificially high or low intercompany transfer price with an overseas unit cannot have any impact on the consolidated financial statements because all intercompany transactions are eliminated in consolidation.
D) For income tax-reporting purposes, transfer prices need not be comparable to sales to outside, third parties.
E) None of the above.

Question 30

_____ In consolidation, which of the following intercompany transactions need not be undone?

A) Intercompany management charges.
B) Intercompany lease income and expense.
C) Intercompany dividend income (when the parent uses the cost method).
D) Intercompany equipment transfers involving a gain or loss.
E) None of the above.

Question 31

_____ Which of the following accounts need not be eliminated in consolidation?

A) Intercompany Sales.
B) Intercompany Cost of Sales.
C) Intercompany Interest Expense.
D) Long-term Intercompany Receivables.
E) None of the above.

Question 32

_____ Which of the following accounts would not require reconciliation or adjustment to a reciprocal balance prior to beginning the consolidation process?

A) Intercompany Receivables.
B) Intercompany Interest Income.
C) Intercompany Sales.
D) Intercompany Management Fee Income.

Question 33

_____ Which of the following accounts would require reconciliation or adjustment to a reciprocal balance prior to beginning the consolidation process?

A) Intercompany Dividend Income (when the parent uses the cost method).
B) Intercompany Sales.
C) Intercompany Cost of Sales.
D) Long-term Intercompany Payable.
E) None of the above.

Question 34

_____ Intercompany accounts that are to have reciprocal balances but are not currently in agreement are adjusted

A) Before the consolidation process.
B) During the consolidation process.
C) After the consolidation process.
D) Not before, during, or after the consolidation process.

Question 35

_____ In consolidation, the most efficient way to eliminate intercompany accounts that are to have reciprocal balances is to use

A) Elimination by proxy.
B) Elimination by rearrangement.
C) Elimination by default.
D) Elimination by reciprocity.
E) None of the above.

Question 36

_____ Which of the following statements is true?

A) Elimination by rearrangement is mandatory under current GAAP.
B) Intercompany inventory transfers at cost do not have to be eliminated.
C) If an intercompany inventory transfer is made in late 2004 but the inventory is not resold to an outside, third party until 2005, the intercompany inventory sale must also be eliminated in 2005.
D) Downstream intercompany inventory sales do not have to be eliminated if the subsidiary is 100% owned.
E) None of the above.

Question 37

_____ For which of the following accounts would it be inappropriate to use elimination by rearrangement?

A) Intercompany Operating Lease Income.
B) Intercompany Cost of Sales.
C) Intercompany Interest Income.
D) Intercompany Notes Payable.
E) None of the above.

Question 38

_____ The IRS's transfer pricing rules do not apply to

A) Intercompany inventory transfers.
B) Intercompany equipment transfers.
C) Intercompany patent charges.
D) Intercompany management fee charges.
E) None of the above.

Question 39

_____ Which of the following statements is false?

A) The IRS's transfer pricing rules apply to inbound transfers.
B) The IRS's transfer pricing rules apply to outbound transfers.
C) Under certain circumstances, the Internal Revenue Service has the authority to set the transfer prices.
D) The Internal Revenue Service requires intercompany inventory transfer prices to be set at halfway between the seller's cost and the buyer's expected selling price.
E) None of the above.

Question 40

_____ Which of the following statements is false?

A) The Internal Revenue Service would be more inclined to audit intercompany transfers to a foreign country having a lower income tax rate than the U.S. income tax rate versus the opposite situation.
B) A company trying to minimize consolidated income taxes would be inclined to set artificially low transfer prices to countries having a higher income tax rate than that of the United States.
C) For inbound intercompany transfers from foreign parent companies, the Internal Revenue Service requires that transfer pricing records be maintained in the United States or be produced within 60 days if kept abroad.
D) The Internal Revenue Service can assess a nondeductible 20% penalty for transfer pricing adjustments that exceed the lesser of (1) $10 million or (2) 10% of gross receipts for a taxable year-40% if the adjustments exceed $20 million.
E) None of the above.

Question 41

_____ A parent and its subsidiary file a consolidated income tax return. The subsidiary issues separate financial statements. The subsidiary's income statement

A) Need not include income tax expense.
B) May include income tax expense calculated as if the subsidiary had filed a separate income tax return.
C) May include income tax expense allocated on an arbitrary and reasonable basis by the parent.
D) Both b and c.
E) None of the above.

Question 42

_____ Which of the following ratios is of very limited usefulness in comparing a parent with a subsidiary when each has a different capital structure?

A) Net Income/Total Assets.
B) Net Income/Stockholders' Equity.
C) Operating Income/Total Assets.
D) Operating Income/Invested Capital (Long-term Debt and Stockholders' Equity).