Question

Computing the amount of investment income and preparing [I] 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 2015 and 2016:

	Subsidiary Net Income	Intercompany Inventory Sales	Gross Profit %	Inventory Remaining at End of Year	Receivable (Payable)
2016	$1,800,000	$270,000	34%	15%	$90,000
2015	$1,440,000	$180,000	30%	18%	$72,000

Assume that inventory not remaining at the end of the year was sold outside of the consolidated group during the year. The subsidiary paid $1,350,000 in dividends during 2016.

a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2016 assuming that it uses the cost method of accounting for its Equity Investment?

$Answer

b. Prepare the required [I] consolidation entries for 2016.

Consolidation Journal
	Description	Debit	Credit
[Icogs]	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	To recognize prior year profit on intercompany sales.
[Isales]	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	To eliminate intercompany sales.
[Icogs]	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	To defer current period profit on intercompany sales.
[Ipay]	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer Correct Mark 1.00 out of 1.00
	AnswerAccounts payableAccounts receivableCost of goods soldInventoryInvestment in subsidiarySales	Answer	Answer
	To eliminate intercompany receivables/payables.

Answer 1

Answer:

a.

The amount of equity income to be reported by the parent in its pre-consolidation income statement for 2016 should be calculated as follows:

	A	B	C
1	Subsidiary Net Income for 2016	$1,800,000	$1,800,000
2	Add: Gross Profit included in inventory remaining at the end of 2015	$ 9,720	=180,000*0.18*0.30
3	Less: Gross Profit included in inventory remaining at the end of 2016	$ (13,770)	=-270,000*0.15*0.34
4	Equity Income to be reported by the statement by the parent in its pre-consolidation income statement.	$ 1,795,950	=SUM(B1:B3)

b.

The Following Consolidated Journal Entries Should be Reported for 2016:

Account title And Explanation	Debit ($)	Credit ($)
Inventory in Subsidiary A/c Dr	9,720
To Cost Of Goods Sold A/c		9,720
Sales A/c Dr	270,000
To Cost Of Goods Sold A/c		270,000
Cost Of Goods Sold A/c Dr	13,770
To Inventory A/c		13,770
Accounts Payable A/c Dr	90,000
To Accounts Receivable A/c		90,000