Explain transfer pricing. What are the three alternative approaches to determine a transfer price?
What will be an ideal response?
Transfer pricing refers to the pricing of goods and services bought and sold by operating units or divisions of a single company. In other words, transfer pricing concerns intracorporate exchanges–transactions between buyers and sellers that have the same corporate parent. As companies expand and create decentralized operations, profit centers become an increasingly important component in the overall corporate financial picture. Appropriate intracorporate transfer pricing systems and policies are required to ensure profitability at each level. When a company extends its operations across national boundaries, transfer pricing takes on new dimensions and complications. In determining transfer prices to subsidiaries, global companies must address a number of issues, including taxes, duties and tariffs, country profit transfer rules, conflicting objectives of joint venture partners, and government regulations.
There are three major alternative approaches to transfer pricing. The approach used will vary with the nature of the firm, products, markets, and the historical circumstances of each case. The alternatives are (1 ) cost-based transfer pricing, (2 ) market-based transfer pricing, and (3 ) negotiated prices.
You might also like to view...
The difference between the speed at which humans speak and the speed at which humans can comprehend is known as the speech–thought differential. What are the speeds of speech and of comprehension in words per minute (wpm)?
A. 150–200 wpm, 400–600 wpm B. 200–25 wpm, 300–400 wpm C. 75–125 wpm, 400–600 wpm D. 150–200 wpm, 300–400 wpm
Inequitable workloads can lead to which of the following relationship concerns?
A. stability B. resentment C. satisfaction D. reaffirmation
Firms sometimes acquire debt securities with the intention of holding these securities until maturity. U.S. GAAP and IFRS require firms to measure marketable securities for which firms have an intent and ability to hold to maturity by _____. A firm initially records these debt securities at acquisition cost. This acquisition cost will differ from the maturity value of the debt if the coupon rate
on the bonds differs from the _____. a. the imputed interest method; required market yield on the bonds at the time the firm acquired them b. the straight-line method; required market yield on the bonds at the time the firm acquired them c. the effective interest method; required market yield on the bonds at the time the firm acquired them d. the effective interest method; required market yield on the bonds at the time the bonds were originally issued. e. the straight-line method; required market yield on the bonds at the time the bonds were originally issued.
The following selected account balances appeared on the financial statements of the Washington Company: Accounts Receivable, Jan. 1 $13,000 Accounts Receivable, Dec. 31 9,000 Accounts Payable, Jan 1 4,000 Accounts payable Dec. 31 7,000 Merchandise Inventory, Jan 1 10,000 Merchandise Inventory, Dec 31 15,000 Sales 56,000 Cost of Goods Sold 31,000 The Washington Company uses the direct method to
calculate net cash flow from operating activities. Cash collections from customers are A) $56,000 B) $52,000 C) $60,000 D) $45,000