Question

Computing the amount of investment income and preparing [U] consolidation entries-Cost method Assume that a wholly owned subsidiary sells inventory to the parent company. The parent company, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2018 and 2019: % Inventory Subsidiary Net Intercompany Remaining at Receivable Income Inventory Sales Gross Profit % End of Year (Payable) 2019 $900,000 $135,000 3096 2096 $45,000 2018 $720,000 $108,000 3596 1596 $36,000 Assume that inventory not remaining at the end of the year was sold outside of the consolidated group during the year. The subsidiary paid $540,000 in dividends during 2019. a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2019 assuming that it uses the cost method of accounting for its Equity Investment? $ 897,570 X b. Prepare the required [l] consolidation entries for 2019.

Answer 1

Solution:

a)

Particulars	Amount
Subsidiary net income for 2019	$900,000
Add: Gross profit included in inventory remaining at the end of 2018 ($108,000*35%*15%)	$5,670
Less: Gross profit included in inventory remaining at the end of 2019 ($135,000*30%*20%)	($8,100)
Equity income to be reported by the parent in its pre consolidation income statement	$897,570

b)

Journal entry:

Sl no	Account title and explanation	Debit	credit
1	Investment in subsidiary	$5,670
	cost of goods sold		$5,670
	(To recoginze prior year profit on intercompany sales)
2	Sales	$135,000
	Cost of goods sold		$135,000
	(To eliminate intercompany sales)
3	Cost of goods sold	$8,100
	Inventory		$8,100
	(To defer current period profit on intercompany sales)
4	Accounts payable	$45,000
	Account receivable		$45,000
	(To eliminate intercompany receivable/payables)

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