1 answer

Preparing a consolidated income statement—Cost method with noncontrolling interest, AAP and upstream and downstream intercompany inventory...

Question:

Preparing a consolidated income statement—Cost method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits A parent company purchased a 70% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $300,000 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 Trademark valued at $120,000. The building asset is being depreciated over a 10-year period and the Trademark is being amortized over a 6-year period, both on the straight-line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $400,000 of intercompany sales. At the beginning of the current year, there were $70,000 of upstream intercompany profits in the parent’s inventory. At the end of the current year, there were $50,000 of downstream intercompany profits in the subsidiary’s inventory. During the current year, the subsidiary declared and paid $100,000 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 $12,000,000 $1,300,000
Cost of goods sold (7,000,000) (650,000)
Gross profit 5,000,000 650,000
Income (loss) from subsidiary 70,000 -
Operating expenses (2,500,000) (370,000)
Net income $2,570,000 $280,000

a. Starting with the parent’s current-year pre-consolidation net income of $2,570,000, compute the amount of current-year net income attributable to the parent that will be reported in the consolidated financial statements.

Do not use negative signs with your answers below.

Reconciliation of Cost to Equity Method Parents pre-consolidation net income $ 2,570,000 Dividend Income 70,000 P% x Net inc Do not use negative signs with your answers below.
b. Prepare the consolidated income statement for the current year.

Consolidated Income Statement Sales $ Cost of goods sold Gross profit Operating expenses Net income Net income attributable t

I need help with part B

Reconciliation of Cost to Equity Method Parent's pre-consolidation net income $ 2,570,000 Dividend Income 70,000 P% x Net income of subsidiary 196,000 P96 x AAP amortization 26,600 P% of Upstream profit 49,000 Downstream profit 50,000 Net income attributable to controlling interest $ 2,668,400
Consolidated Income Statement Sales $ Cost of goods sold Gross profit Operating expenses Net income Net income attributable to noncontrolling interests Net income attributable to the parent ✓$ 12,400,000 X 7,100,000 X 5,300,000 X 2.908,000 2,392,000 x 291,400 X 2,683,400 x ►

Answers

Consolidated Income Statement
Sales (12,000,000 + 1,300,000- 400,000) 12,900,000
Cost of goods sold (7,000,000 + 650,000 - 20,000)     7,630,000
Gross profit     5,270,000
Operating expenses     2,908,000
Net income     2,362,000
Net Income attributable to noncontrolling interests         93,600
Net Income attributable to the parent     2,268,400
.

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