Parrot Corporation holds a 42 percent ownership of Sunrise, Inc., and applies the equity method to account for its investment. Parrot assigned the entire original excess purchase price over book value to goodwill. During 2020, the two companies made intra-entity inventory transfers. A portion of this merchandise was not resold until 2021. During 2021, 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 gross profit deferral computed in applying the equity method?
d. How should Parrot compute the amount of equity income to be recognized in 2020? What entry is made to record this income?
e. How should Parrot compute the amount of equity income to be recognized in 2021?
f. If none of the transferred inventory had remained at the end of 2020, how would these transfers have affected the application of the equity method?
g. How do these intra-entity transfers affect Sunrise’s financial reporting?
