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Differences between upstream and downstream inventory sale

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Distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale is upstream or downstream? How do unrealized intercompany profits on a downstream sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest? Explain.

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An upstream sale is when the subsidiary sells to the parent. Downstream is the reverse, with the parent selling to the subsidiary.
During consolidation, intercompany profit (for items not yet sold to parties outside the consolidated group) is eliminated since the two entities are treated as one economic entity ...

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See Also This Related BrainMass Solution

Three advanced accounting problems that illustrate the following concepts:
Upstream and Downstream Sales
Workpaper Journal Entries and Income Statement Balances
Multiple Stock Purchases

Upstream and Downstream Sales

Pace Company owns 85% of the outstanding common stock of Sand Company and all the outstanding common stock of Star Company. During 2012, the affiliates engaged in intercompany sales as follows (see attached Excel file).

Please show all work for the following:

A. Prepare in general journal form the workpaper entries necessary to eliminate intercompany sales and intercompany profit in the December 31, 2012, consolidated financial statements workpaper.

B. Calculate the balance to be reported in the consolidated income statement for the following line items:

1. Consolidated income
2. Non-controlling interest in consolidated income
3. Controlling interest in consolidated income

Problem 7-1

Workpaper Journal Entries and Income Statement Balances

Powell Company owns 80% of the outstanding common stock of Sullivan Company. On June 30, 2011, Sullivan Company sold equipment to Powell Company for $500,000. The equipment cost Sullivan Company $780,000 and had accumulated depreciation of $400,000 on the date of the sale. The management of Powell Company estimated that the equipment had a remaining useful life of four years from June 30, 2011. In 2012, Powell Company reported $300,000 and Sullivan Company reported $200,000 in net income from their independent operations (including sales to affiliates but excluding dividend or equity income from subsidiary).

Please show all work for the following:

A. Prepare in general journal form the workpaper entries necessary because of the intercompany sale of equipment in:

(1) The consolidated financial statements workpaper for the year ended December 31, 2011.

(2) The consolidated financial statements workpaper for the year ended December 31, 2012.

B. Calculate the balances to be reported in the consolidated income statement for the year ended December 31, 2012, for the following items:
(1) Consolidated income.
(2) Non-controlling interest in consolidated income.
(3) Controlling interest in consolidated income.

Problem 8-1

Multiple Stock Purchases

Sarko Company had 300,000 shares of $10 par value common stock outstanding at all times, and retained earnings balances as indicated here (see attached Excel file).

Pelzer Company acquired Sarko Company stock through open-market purchases as follows (see attached Excel file):

Sarko Company declared no dividends during this period. The fair values of Sarko Company's assets and liabilities were approximately equal to their book values throughout this period (2010 through 2012). Pelzer Company uses the cost method.

Please show all work for the following:

A. Prepare a schedule to compare investment cost with the book value of equity acquired.

B. Prepare elimination entries for the preparation of a consolidated statements workpaper on December 31, 2012.

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