Week 4 Case C6 1 a The rule 1 covers a part of elimination needed it says in textbook when there have been intercompany inventory transactions eliminating entries are needed to remove the revenue and expenses related to the intercompany transfers recorded by the individual companies So the eliminations ensure only the cost of the inventory to the consolidated entity is included in the consolidated balance sheet when the inventory is still on hand and it charged to cost of goods sold in the period the inventory is resold to nonaffiliated b When intercompany sales include unrealized profits or losses the worksheet eliminations needed for consolidation in the period of transfer must adjust accounts in both the consolidated income statement and balance sheet Income statement Sales and cost of goods sold The sales revenue from the intercompany sale and the related cost of goods sold recorded by the transferring affiliate must be removed Balance sheet Inventory The profit or loss on the intercompany sale must be removed so the inventory is reported at the cost to the consolidated entity c Yes under a perpetual inventory system a purchase of merchandise is debited directly to the inventory account a sale requires a debit to Cost of Goods Sold and a credit to Inventory for the cost of the item d The employee should look at the books of the selling affiliate and determine the difference between the sale price and the costing or carrying value In some companies the sale prices to an affiliate is the same as the price to any other customer markup inventory transferred to affiliates by a certain percentage of cost or have elaborate transfer pricing policies designed to encourage internal sales However employee should determine profit from above examples