BBA108_Financial and Management Accounting(Draft 2)-converted-converted

In the event that the cost contrasts, at that point one of the substances is off guard and would at last beginning purchasing from the market to improve cost. KEY WORDS • Intangible: An intangible is essentially a company asset that is not physical or financial in nature. • Trademark valuation: As organizations can sell and license their trademarks and other IP, it is important that they understand how much it is worth before they do so. Valuation of trademarks and other types of IP is also used for many other purposes, including transfer pricing and tax compliance. • Transfer pricing: To put it simply, transfer pricing is the amount of money that changes hands when a transaction takes place between related company entities. Find out more by reading our in-depth blog on transfer pricing. • Benchmarking study: This is an in-depth overview of comparable license agreements and royalty rates that taxpayers can use to assess whether their transfer pricing complies with the arm’s length principle. • Intellectual property (IP): An organization’s IP refers to intangible assets that it has invented, created or acquired, such as know-how, technology and brand names. IP can be legally protected by patents, copyright and trademarks. LEARNING ACTIVITY 1. Perrin Co has two divisions, A and B. Division A has limited skilled labour and is operating at full capacity making product R. It has been asked to supply a different product, S, to division B. Division B currently sources this product externally for $1400 per unit. The same grade of materials and labour is used in both products. The cost cards for each product are shown below: Product R S ($)/unit ($)/unit Selling price 1200 - Direct materials ($50 per kg) 400 300 148 CU IDOL SELF LEARNING MATERIAL (SLM)

Direct labour ($20 per hour) 160 240 Apportioned fixed overheads ($15 per hour) 120 180 Using an opportunity cost approach to transfer pricing, what is the minimum transfer price? 2. Royal Ltd has two divisions, AB and CD. Division AB makes a component for air conditioning units which it can only sell to Division CD. It has no other outlet for sales. Current information relating to Division A is as follows: Marginal cost per unit $200 Transfer price of the component $330 Total production and sales of the component each year 4400 units Specific fixed costs of Division A per year $20,000 Royal Ltd has offered to sell the component to Division CD for $280 per unit. If Division CD accepts this offer, Division AB will be closed. If Division CD accepts Royal Ltd.’s offer, what will be the impact on profits per year for the group as a whole? UNIT END QUESTIONS A. Descriptive Type question 1. Define is transfer pricing? 2. Illustrate the reason HUL review transfer pricing? 3. Identify why is transfer pricing the number one tax issue facing multinationals globally? 4. Analyse the reasons transfer pricing red flags for tax authorities? 5. Evaluate some best practices in transfer pricing? 6. Discuss transfer pricing and why is it used? B. Multiple Choice Questions: 1. If there is excess capacity, the transfer price is often a. market price 149 CU IDOL SELF LEARNING MATERIAL (SLM)

b. opportunity cost plus incremental cost c. variable cost or variable cost-plus profit d. full cost-plus profit 2. A dual transfer pricing system is set up where a. the two sides cannot agree on a price and the difference between the two sides is absorbed by the home office b. a ready market price is not available and the two sides must come up with an agreeable price c. the buyer buys at variable cost and the seller only sells at full cost d. the two sides agree to use a cost basis for transfer pricing 3. The objective(s) of transfer pricing are a. to motivate managers b. to provide an incentive for managers to make decisions consistent with the firm's goals c. to provide a basis for fairly rewarding the managers d. All of these 4. The basic methods used in transfer pricing are a. variable or full costs b. dual prices c. market price or negotiated price d. All of these 5. Market pricing approach in transfer pricing 150 a. helps to preserve unit autonomy b. provides incentive for the selling unit to be competitive with outside suppliers c. has arm's-length standard desired by taxing authorities d. may be the most practical approach when there is significant conflict Answer CU IDOL SELF LEARNING MATERIAL (SLM)

1. c 2. a 3. d 4. d 5. d REFERENCES • Anthony, R.N. and Reece, J.S. (1988). Accounting Principle. New York: Richard Irwin Inc. • Gupta RK. and Radha swamy, M. (2004). Financial Accounting. New Delhi: Sultan Chand and Sons • Monga J. R, Ahuja Girish, and Sehgal Ashok. (2014). Financial Accounting. Noida: Mayur Paper Back. • Shukla, M.C. Grewal T.S. and Gupta, S.C. (2016). Advanced Accounts. New Delhi: S. Chand & Co. • R.K. Mittal, M.R. Bansal. (2018). Advanced Financial Accounting. New Delhi: VK Publications. 151 CU IDOL SELF LEARNING MATERIAL (SLM)

cu UflIVERSITT BBA FINANCIAL AND MANAGEMENT ACCOUNTING CHAhDIGARH BBA108 IJNIVERSIW Discover. Learn. E mpower. www.cuidoI.in 1800-1213-88800 INSTITUTE OF BISTANCE & ONLINE LEARNING NH-95, Cbandigarb-Ludbiana Highway, Gbaruan,Mobali (Punjab) Phone:- /5 2700963 J | Email: [email protected] FOLLOW US ON: $ V in Tate ,•