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 2023, the two companies made intraentity inventory transfers. A portion of this merchandise was not resold until 2024. During 2024, additional transfers were made.

a. What is the difference between upstream transfers and downstream transfers?

b. How does the direction of an intraentity transfer (upstream versus downstream) affect the application of the equity method?

c. How is the intraentity gross profit deferral computed in applying the equity method?

d. How should Parrot compute the amount of equity income to be recognized in 2023? What entry is made to record this income?

e. How should Parrot compute the amount of equity income to be recognized in 2024?

f. If none of the transferred inventory had remained at the end of 2023, how would these transfers have affected the application of the equity method?

g. How do these intraentity transfers affect Sunrise’s financial reporting?