Question

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

A) The investor and investee make reciprocal entries to defer and realize inventory profits.
B) The same adjustments are made for upstream and downstream transfers.
C) Different adjustments are made for upstream and downstream transfers.
D) No adjustments are necessary.
E) Adjustments will be made only when profits are known upon sale to outsiders.

Answer 1

Different adjustments are needed for unrealized profits in intra-entity inventory transfers under the equity method, depending on whether the transfer is upstream or downstream. option c.

Step-by-step explanation:

The statement that is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method is: Different adjustments are made for upstream and downstream transfers.

This means that when an investor sells inventory to an investee (downstream transfer) or vice versa (upstream transfer), the unrealized profit embedded in the inventory must be eliminated from the investor's income to the extent of the investor's ownership interest in the investee. Profits are not fully recognized until the inventory is sold to an outside party. The adjustments for downstream and upstream transactions differ because the ownership influence is exerted at different points in the transaction chain.