Parrot Corporation holds a 42 percent ownership of Sunrise, Inc. The equity method is being applied. No goodwill or other allocation occurred in the purchase of this investment. During 2008, the two companies made intercompany inventory transfers. A portion of this merchandise was not resold until 2009. During 2009, additional transfers were made.

a.What is the difference between upstream transfers and downstream transfers?

h. How does the direction of an intercompany transfer (upstream versus downstream) affect the ap¬ plication of the equity method?

c. How is the intercompany unrealized gross profit computed in applying the equity method?

d. How should Parrot compute the amount of equity income to be recognized in 2008? What entry is made to record this income?

e. How should Parrot compute the amount of equity income to be recognized in 2009?

f. If none of the transferred inventory had remained at the end of 2008, how would these transfers have affected the application of the equity method?

g. How do these intercompany transfers affect Sunrise’s financial reporting?