Question

Computing the amount of equity income and preparing [I] consolidation journal entries - Equity method

Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2018 and 2019:

	Subsidiary Net Income	Intercompany Inventory Sales	Gross Profit on Unsold Inventories	Receivable (Payable)
2019	$400,000	$50,000	$18,000	$20,000
2018	$300,000	$60,000	$20,000	$25,000

Assume that inventory not remaining at the end of the year was sold outside of the consolidated group. The subsidiary paid $100,000 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 equity method of accounting for its Equity Investment?

$Answer

b. Prepare the required [I] consolidation journal entries for 2019.

Consolidation Spreadsheet
Description		Debit	Credit
[Icogs]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
[Isales]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
[Icogs]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
[Ipay]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer

Answer 1

Answer:

a.) The amount of equity income to reported by the parent in its pre-consolidation income statement for 2019 should be calculated as follows:

Particulars	Amount
Subsidiary net income for 2019	$400,000
Add: Gross profit included in inventory remaining at the end of 2018	$20,000
Less: Gross profit included in inventory remaining at the end of 2019	($18,000)
Equity income to be reported by the parent in its pre-consolidattion income statement	$402,000

b.) The following consolidation journal entries should be prepared for 2019:

Date	particulars	Debit ($)	Credit ($)
[Icogs]	Investment in Subsidiary	$20,000
	Cost of goods sold		$20,000
[Icogs]	Sales	$50,000
	Cost of goods sold		$50,000
[Icogs]	Cost of goods sold	$18,000
	Inventory		$18,000
[Ipay]	Accounts payable	$60,000
	Accounts Receivable		$60,000