When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is:
A) the parent and the subsidiary is less than wholly owned.
B) a wholly owned subsidiary.
C) the subsidiary and the subsidiary is less than wholly owned.
D) the parent of a wholly owned subsidiary.

Question

Quizplus · Accepted Answer

When the subsidiary (which is less than wholly owned) sells to the parent, unrealized intercompany gains are allocated proportionately by percent of ownership between parent and subsidiary. This is because the non-controlling interest (outside shareholders of the subsidiary) also has a share in the subsidiary's profits, including those unrealized gains on sales to the parent.

When Preparing Consolidated Financial Statement Workpapers, Unrealized Intercompany Gains, as a Result