Question

Preparing a consolidated income statement—Equity method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits
A parent company purchased a 70% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $350,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $200,000 and to an unrecorded patent valued at $150,000. The building asset is being depreciated over a 16-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $600,000 of intercompany sales. At the beginning of the current year, there were $40,000 of upstream intercompany profits in the parent’s inventory. At the end of the current year, there were $60,000 of downstream intercompany profits in the subsidiary’s inventory. During the current year, the subsidiary declared and paid $80,000 of dividends. The parent company uses the equity method of pre-consolidation investment bookkeeping. Each company reports the following income statement for the current year:

	Parent	Subsidiary
Income statement:
Sales	$10,000,000	$1,000,000
Cost of goods sold	(6,800,000)	(600,000)
Gross profit	3,200,000	400,000
Income (loss) from subsidiary	37,125	-
Operating expenses	(1,800,000)	(270,000)
Net income	$1,437,125	$130,000

a. Compute the Income (loss) from subsidiary of $37,125 reported by the parent company in its preconsolidation income statement.

Do not use negative signs with your answers below.

Subsidiary's net income		$Answer
AAP		Answer
Upstream sales		Answer
Adjusted subsidiary income		$Answer
P % of interest	X	Answer	%
		Answer
Downstream sales		Answer
Income (loss) from subsidiary		$Answer

b. Prepare the consolidated income statement for the current year.

Do not use negative signs with your answers below.

Consolidated Income Statement
Sales	$Answer
Cost of goods sold	Answer
Gross profit	Answer
Operating expenses	Answer
Answer

Net income	Answer
Net income attribute to non controlling interests

Net income attributes to parent

Answer 1

ANSWER:

Preparing a consolidated income statement—Equity method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits