Question

2. Why does the direction of an inter-company sale of inventory matter when the parent has a controlling interest in the subsidiary, but not when the investor only has a significant influence, even though both might use the equity method to account for their respective investments

Answer 1

Answer:

Intercompany sales between a parent company and a subsidiary must be recorded at cost of goods sold, it cannot include any type of profit margin. The parent company prepares a consolidated balance that includes its affiliates.

On the other hand, if a company only exercises a significant influence over another, but doesn't present a consolidated balance, then it can sell its products and services and make a profit. In this case, both companies are completely separated entities and there is no limitation regarding the transactions that they might engage in.

Answer 2

Answer:

Because of the addition of Inventory figures on the parent company's balance sheet

Explanation:

The direction of an inter-company sale of inventory matter when the parent has a controlling interest in the subsidiary, but not when the investor only has a significant influence, even though both might use the equity method to account for their respective investments  because:

When the company only has significant influence figures are not consolidated in the balance sheet but when the parent has controlling interest, the inventory figures are added on the balance sheet of the parent and inter-company sale needs to be adjusted.