Question

Below are the income statement information for 2015 of COS and its 80% owned subsidiary “H&M”.

	Parent	Subsidiary
Sales	9,000,000	5,400,000
Cost of goods sold	4,500,000	1,800,000
Gross profit	4,500,000	3,600,000
Operating expense	2,250,000	720,000
Net income	2,250,000	2,880,000

During 2015, Subsidiary sold goods to its parent for $ 1,700,000 with a cost of 1,250,000 . The remaining inventory on the hand with the parent is 35%.

Required

1--Compute the unrealized profit – ending

2-Compute profit for 2015 for the: (5 marks, 2.5 each)

Non-controlling interest

Parent profit

3-Prepare the consolidated income statement for 2015, show the elimination entries.

Answer 1

10 Subsidiary sold goods to parent = $ 17,00,000

cost of goods sold = $ 12,50,000

therefore, profit made by sales = (17,00,000 - 12,50,000)

= 4,50,000

Closing stock of parent = (17,00,000 * 35%)

= 5,95,000

therefore profit include in closing stock = (4,50,000 * 35%)

= 1,57,500

Here, parent owned 80% shares of subsidiary company, so that in profit of closing stock only 80% is treated as unrealised profit. The 20% profit of closing stock is for minority (other 20% share holders).

therefore, unrealised profit = (1,57,500 * 80%)

= $ 1,26,000