In: Accounting
A parent company purchased a 90% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $276,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $180,000 and to an unrecorded patent valued at $96,000. The building asset is being depreciated over a 12-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During a previous year, the subsidiary sold to the parent company a piece of depreciable property. The unconfirmed upstream gain on this intercompany transaction was $120,000 at the beginning of the current year. The upstream gain confirmed each year is $24,000. During the current year, the subsidiary declared and paid $90,000 of dividends. The parent company uses the cost method of pre-consolidation investment bookkeeping. Each company reports the following income statement for the current year:
Parent | Subsidiary | |
---|---|---|
Income statement: | ||
Sales | $4,600,000 | $1,500,000 |
Cost of goods sold | (3,280,000) | (924,000) |
Gross profit | 1,320,000 | 576,000 |
Income (loss) from subsidiary | 81,000 | 0 |
Operating expenses | (960,000) | (384,000) |
Net income | $441,000 | $192,000 |
a. Starting with the parent’s current-year pre-consolidation net
income of $441,000, compute the amount of current-year net income
attributable to the parent that will be reported in the
consolidated financial statements.
Calculation of Profit from Subsidiary $
Net Income 1,92,000
Less building asset depreciated 15,000 (1,80,000/12yrs)
Less Patent amortized 12,000 (96,000/8yrs)
Less Upstream Gain 24,000
Less Dividend Paid 90,000
1,05,000
Parent share in Profit -90%(1,05,000) 94,500
Amount of current-year net income attributable to the parent that will be reported in the consolidated financial statements.
Particulars $
Profit of Parent Company 4,41,000
Add-Profit Share in Subsidiary 94,500
Net Profit As per Consolidation 5,35,500