Case facts:

Agua Fixtures Corporation has been supplying high-quality kitchen fixtures to its customers for several decades and uses a LIFO inventory system. Rapid increases in the cost of fixtures have resulted in inventory values substantially below current replacement cost. To bring its inventory carrying costs up to more reasonable levels, Agua Fixtures sold its entire inventory to Chandler Corporation and purchased an entirely new supply of inventory items from Persimmon Manufacturing. Aqua Fixtures owns common stock of both Persimmon and Chandler.

Agua Fixtures' external auditor immediately pointed out that under some ownership levels of these two companies, Agua Fixtures could accomplish its goal of bringing its inventory carrying costs closer to current replacement cost and under other levels it could not.

Requirements:

In the form of an interoffice memorandum, you are to prepare responses to Agua Fixtures president addressing the following issues.

1. Based upon your research using the Accounting Standards Codification (ASC), describe the effects of intercompany transfers on the valuation of inventories. Include summarized citations from the ASC to support your statements. Wherever possible, you are to specifically connect the standards to the case facts.

2. Based upon your research using the ASC, discuss the effects that different ownership levels of Persimmon and Chandler would have on the success of Agua Fixtures plan. Include summarized citations from the ASC to support your statements. Wherever possible, you are to specifically connect the standards to the case facts.