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Assume that a parent company acquired 80% of a subsidiary on January 1, 2014. The purchase...

Assume that a parent company acquired 80% of a subsidiary on January 1, 2014. The purchase price was $175,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned entirely to an unrecorded Patent owned by the subsidiary. The assumed economic useful life of the patent is 10 years.

Assume that subsidiary sells inventory to the parent. The parent, ultimately, sells the inventory to customers outside of the consolidated group. You have complied the following data for the years ending 2015 and 2016 related with intra-entity inventory sales.

                Inventory Sales                 Gross Profit Remaining in Unsold Inventory

2016           $ 103,300                                   $29,441

2015           $ 87,900                                     $19,137

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The unsold part will be sold to unaffiliated entities in the following year. The parent company applies equity method for this investment.

Subsidiary reports $216,930 as net income on its income statement for the year of 2016.

  1. Show the computation to yield the pre-consolidation balance for Equity income in subsidiary (appeared under parent company’s income statement) during 2016.
  2. If the intra-entity sales changes from upstream to downstream, then how would the balance change for Equity income in subsidiary during 2016.
  3. Show the consolidation adjustment entries related to intra-entity inventory sales.

Solutions

Expert Solution

Parent Company hold 80 % of Subsidary Company.

Date of acquisition 01/01/2014

Excess paid $175,000 which has been adjusted by assigned unrecorded patent by subsidary.

Internal transaction :  Inventory from subsidary to parent to outside customer

Profit on unsold inventory 2015 : $19,137

2016 : $29,441

Total Income of subsidary for 2016 = $216,930

The adjustment required in 2016 is as below:

DEBIT Sales $29,441

CREDIT Inventory $ 29,441

With this the unrealised profit will be eliminated from the Net income as well as the carrying amount of inventory at the 2016 financial statement.

Net recognized income of subsidary : 216,930 - 29,441+19,137 =206,626

Share of parent Company : 80% of 227,234 = 165,300.80

It is Upstream intra entity sales

If it is changed to down stream mean from parent to subsidary then profit calculation will be same but no need to apply %holding beacause it is in hand of controling entity (i.e Parent company ).

Profit of the parent company will reduce by whole profit on ending unsold inventory lying with subsidary.

ekkarill92 answered 1 year ago
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