Question

The consolidated income statement for POP Industries and its 75% Subsidiary, SAS at the end of 2019 was as follows: Consolidated sales $900,000 , Consolidated cost of Sales $500,000 Operating expenses $200,000, Noncontrolling interest share $25,000 ,and Controlling interest share $175,000.

After preparing the consolidated income statement, the accountants discovered that POP had sold inventory that cost $75,000 to SAS for $95,000, and SAS had sold inventory that cost $40,000 to POP for $58,000. Half of the products from both transactions still remained in inventory at December 31, 2019. These intercompany sales transactions had not been properly eliminated in consolidation.

Required: Prepare the consolidated income statement for POP and Subsidiary for 2019 after correcting these errors. (Support your answer with detailed Formulas, calculations and explanation)                                                                                 

Answer 1

`

Cost of Sales = Opening Stock + Purchases + Operating Expenses - Closing Stock - Non Operational Income + Non Operational Exp

Cost Of Sales = 500000

Opening Stock = Not given - considered as Zero

Operating Expense = 200000

Purchase = Not given - Inter company transactions are only Available - It is therefore assumed that these are exhaustive purchases

Working Note 1 - Purchases

Sales by POP =

Cost for POP = 75000

Profit for POP = 20000

Cost for SAS = 95000

Sales by SAS =

Cost for SAS = 40000

Profit for SAS = 18000

Cost for POP = 58000

Total Purchases = 95000 + 58000

Closing Stock =

Working Note 2 - Closing Stock and Stock Reserve

Held by POP = half of what has been purchased from SAS

Actual Cost = 40000/2

20000

Stock Reserve = 58000/2 - 20000

9000

Held By SAS = half of what has been purchased from POP

Actual Cost = 75000/2

37500

Stock Reserve = 95000/2 - 37500

10000

Total Stock (Without stock reserve) = 20000+37500

57500

Stock Reserve = 19000

Non Operational Expense = 500000 - 200000 + 76500

=

376500

Consolidated Income Statement of POP Industries
Using Assumption 1 - Sales and purchases both are yet un adjusted and Purchases are included in Operating Exp
Sales		9,00,000.00
less - Interunit Sales	-153000
		747000	747000
Operating Exp	200000
less - Interunit Purchases	-153000
		47000	47000
Non Operating Exp	376500	376500
Closing Stock	76500
Less - Stock Reserve	-19000
		57500	57500
Cost Of Sales		366000
Profit			381000
Using Assumption 2 - Sales and Purchases are already Adjusted and Purchases are not included in operating Exp
Sales		900000	900000
Operating Exp	200000	200000
Non Operating Exp	376500	376500
Closing Stock	76500
Less - Stock Reserve	-19000
		57500	57500
Cost Of Sales		366000
Profit			381000