Question

Company A and Company B are both wholly owned subsidiaries of Parent, Inc. Parent has no other operations, balance sheet items or income statement items other than its ownership of Company 1 (located in China) and Company 2 (located in US). Company 2 periodically sells goods to Company 1 for resale to end customers. Such goods are sold at the same pricing terms that Company 2 sells to all other customers. Prior to January 1, 2018, there had never been any inventory sales from Company 1 to Company 2 or from Company 2 to Company 1. The following is data for each company for 2018 and 2019:

Company 1 Company 2

     Year ended 12/31/18

Sales to all customers $300 million $150 million

Costs of sales $150 million $100 million

All other non production expenses $ 60 million $ 40 million

Pre tax income $ 90 million $ 10 million

Inventory purchased from Company 1 held

By Company 2 at end of year NONE

Inventory purchased from Company 2 held

By Company 1 at end of year $15 million

    Year ended 12/31/19

Sales to all customers $280 million $160 million

Costs of sales $140 million $120 million

All other non production expenses $ 60 million $ 30 million

Pretax income $ 80 million $ 10 million

Inventory purchased from Company 1 held

By Company 2 at end of year NONE

Inventory purchased from Company 2 held

By Company 1 at end of year $16 million

What would consolidated pretax income be for Parent for 2018 and 2019

Answer 1

Calculation of Consolidated Pretax Income of Parent Inc. For 2018
Particulars	Company 1	Company 2	Consolidated
Sales	300	150	450
Less;-               Cost of Sales	150	100	250
Gross income	150	50	200
Less;-   Non Production Expenses	60	40	100
PreTax Income	90	10	100

Calculation of Consolidated Pretax Income of Parent Inc. For 2019
Particulars	Company 1	Company 2	Consolidated
Sales	280	160	440
Less;-               Cost of Sales	140	120	260
Gross income	140	40	180
Less;-   Non Production Expenses	60	30	90
PreTax Income	80	10	90

Hence, Consolidated Pretax Income of Parent Inc. for 2018 Would be = $100 Million

Hence, Consolidated Pretax Income of Parent Inc. for 2019 Would be = $90 Million