Question

2) 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

ORIGINAL CONSOLIDATED INCOME STATEMENT
PARTICULARS	$
Consolidated Sales	9,00,000
Cost of sales	5,00,000
Gross profit	4,00,000
Operating expenses	2,00,000
Operating profit	2,00,000
Net income attributable to non controlling interest	1,75,000
Net income attributable to controlling interest	25,000

CORRECTED CONSOLIDATED INCOME STATEMENT
PARTICULARS	$
Consolidated Sales	8,42,000
Cost of sales	4,51,000
Gross profit	3,91,000
Operating expenses	2,00,000
Operating profit	1,91,000
Net income attributable to non controlling interest	1,66,000
Net income attributable to controlling interest	25,000

The inter group sales by SAS to POP of $58,000 needs to be eliminated from both sales and cost of sales. This must be eliminated, irrespective of whether the items remain unsold at the year end. This is because the consolidated statement of profit or loss needs to show revenue and costs of sales which reflects group performance with external, non-group, entities.

Further half of the inventory of value 29,000 is still in stock. The unrealised profit on this i.e. 29000 X (58000-40000)/58000 = 9,000 needs to be eliminated from inventory. The journal entry is

Cost of sales Dr. 9,000

Stock Cr. 9,000

Therefore corrected cost of sales = 500,000 less 58,000 plus 9,000

Corrected sales = 900,000 less 58,000 = 842,000