Question

On January 1, Year 2, PAT Ltd. acquired 90% of SAT Inc. when SAT’s retained earnings were $1,000,000. There was no acquisition differential. PAT accounts for its investment under the cost method. SAT sells inventory to PAT on a regular basis at a markup of 30% of selling price. The intercompany sales were $160,000 in Year 2 and $190,000 in Year 3. The total amount owing by PAT related to these intercompany sales was $60,000 at the end of Year 2 and $50,000 at the end of Year 3. On January 1, Year 3, the inventory of PAT contained goods purchased from SAT amounting to $70,000, while the December 31, Year 3, inventory contained goods purchased from SAT amounting to $80,000. Both companies pay income tax at the rate of 40%.

Selected account balances from the records of PAT and SAT for the year ended December 31, Year 3, were as follows:

	PAT	SAT
Inventory	$510,000	$400,000
Accounts Payable	700,000	420,000
Retained Earnings, Beg. of Year	2,500,000	1,200,000
Sales	4,100,000	2,600,000
Cost of Sales	3,200,000	1,800,000
Income Tax Expense	180,000	150,000

Determine the amount to report on the Year 3 consolidated financial statements for the selected accounts noted above.

Answer 1

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Intercompany balances
Intercompany Sale/Purchase for Year 3	$     190,000	(a)
Balance owed at end of Year 3	$       50,000	(b)
Intercompany inventory profits	Before tax	40%	After Tax
Beginning Inventory, Upstream ($70,000*30%)	$       21,000	$        8,400	$     12,600	(c)
Ending Inventory, Upstream ($80,000*30%)	$       24,000	$        9,600	$     14,400	(d)
Consolidated account balances
Inventory ($510,000 + $400,000 – $21,000 c)			$   889,000
Accounts payable ($700,000 + $420,000 – (b) 50,000)			$1,070,000
Retained earnings, beginning of year
PAT- Retained Earning		$2,500,000
SAT-Retained Earning, Beginning	$ 1,200,000
SAT-Retained Earning, Acquisition date	$-1,000,000
Change since acquisition	$     200,000
Less: unrealized profit in beginning inventory (c)	$     -12,600
	$     187,400
PAT’s share	x 90%	$   168,660
Consolidated retained earnings			$2,668,660
Sales ($4,100,000 + $2,600,000 – (a) 190,000)			$6,510,000
Cost of sales ($3,200,000+$1,800,000–(a) $190,000 + (d) $24,000–(c) $21,000)			$4,813,000
Income tax expense ($180,000 + $150,000 – (d) $9,600 + (c) $8,400)			$   328,800