Parrot Corporation holds a 42 percent ownership of Sunrise, Inc. The equity method is being applied.
Parrot assigned the entire original excess purchase price over book value to goodwill. During 2010, the two companies made intra-entity inventory transfers. A portion of this merchandise was not resold until 2011. During 2011, additional transfers were made.
a. What is the difference between upstream transfers and downstream transfers?
b. How does the direction of an intra-entity transfer (upstream versus downstream) affect the application of the equity method?
c. How is the intra-entity unrealized gross profit computed in applying the equity method?
d. How should Parrot compute the amount of equity income to be recognized in 2010? What entry is made to record this income?
e. How should Parrot compute the amount of equity income to be recognized in 2011?
f. If none of the transferred inventory had remained at the end of 2010, how would these transfers have affected the application of the equity method?
g. How do these intra-entity transfers affect Sunrise's financial reporting?