(Intercompany transactions, LO 1) Batteau Inc. (Batteau) is a 100%-owned subsidiary of Castaway Ltd. (Castaway). During the year ended May 31, 2006, Batteau sold, on credit, merchandise costing $700,000 to Castaway for $1,200,000. During fiscal 2006 Castaway sold, on credit, the merchandise it had purchased from Batteau to third parties for $2,000,000. These were the only transactions that Castaway and Batteau entered into during 2006 (with each other or with third parties) and there were no other costs incurred.

Required:

a. Prepare an income statement for Batteau for the year ended May 31, 2006.

b. What amount of accounts receivable would Batteau report on its May 31, 2006 balance sheet?

c. What amount of inventory and accounts payable would Castaway report on its May 31, 2006 balance sheet?

d. Prepare Castaway’s May 31, 2006 consolidated income statement assuming that intercompany transactions are not eliminated. How much would be reported for accounts receivable, inventory, and accounts payable on the May 31, 2006 consolidated balance sheet?

e. Prepare Castaway’s May 31, 2006 consolidated income statement assuming that intercompany transactions are eliminated. How much would be reported for accounts receivable, inventory, and accounts payable on the May 31, 2006 consolidated balance sheet?

f. Discuss the differences in the information you prepared in parts

(d) and (e).

Which information is more useful to stakeholders? Explain.