Q1. What is an upstream sale? How it is different from downstream sale. Which company may have unrealized profit on its book in both the cases?
Q2. Plug Corporation purchased 60% of Coy Company's common stock approximately 10 years ago. On January 1, 20X2, Coy sold equipment to Plug for $850,000 and recorded a $ 150,000 loss on the sale. Coy had purchased the equipment for $ 1,200,000 on January 1, 20X0 and was depreciating it on a straight-line basis over 12 years with no assumed residual value.
In preparing Plug's consolidated financial statements for 20X2 its chief accountant increased the reported amount of the equipment by $150,000 and eliminated the loss on the sale of equipment recorded by Coy. No other elimination or adjustments related to the equipment were made.
Required: As a member of the audit firm Gotcha and Gotcha, you have been asked, after reviewing Plug's consolidated income statement, to prepare a memo to Plug's controller detailing the elimination procedures that should be followed in transferring equipment between subsidiary and parent. Include citations to or quotations from the authoritative literature to support your recommendations. Your memo should the correct eliminating entry and explain why each debit and credit is needed.
Q3. Alex Company had the following foreign currency transactions:
On November 1, 2016, Alex purchased machine parts from a company located in Berlin, Germany. Merchant is to pay €125,000 on February 1, 2017.
The direct exchange rates are as follows:
November 1, 2016 ....... €1 = $0.60
December 31, 2016....... €1 = $0.62
February 1, 2017......... €1 = $0.58
Required -
a. Prepare T-accounts and entries for the following account related to these transactions: Accounts Payable (€).
b. Within the T-accounts and entries you have prepared, appropriately record the following items:
1. The November 1, 2016, import transaction (purchase).
2. The December 31, 2016, year-end adjustment required of the foreign currency- denominated payable of €125,000.
3. The February 1, 2017, adjusting entry to determine the U.S. dollar-equivalent value of the foreign currency payable on that date.
4. The February 1, 2017, settlement of the foreign currency payable.