Question

Problem 3: Assume that a parent company acquired 80% of a subsidiary on January 1, 2014. The purchase price was $175,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned entirely to an unrecorded Patent owned by the subsidiary. The assumed economic useful life of the patent is 10 years. Assume that subsidiary sells inventory to the parent. The parent, ultimately, sells the inventory to customers outside of the consolidated group. You have complied the following data for the years ending 2015 and 2016 related with intra-entity inventory sales. Inventory Sales Gross Profit Remaining in Unsold Inventory 2016 $ 103,300 $29,441 2015 $ 87,900 $19,137 The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The unsold part will be sold to unaffiliated entities in the following year. The parent company applies equity method for this investment. Subsidiary reports $216,930 as net income on its income statement for the year of 2016.

Show the consolidation adjustment entries related to intra-entity inventory sales. (6 pts)

Answer 1

ANSWER:

1)

Pre consolidation balance for equity income

Balance shown in the equity for the year 2016 = 216930

Less: profit earned for the year 2015 = 15310

Less: Profit earned for the year 2014 = 23553

Pre consolidation balance for equity = 178067

2)

If the intra entity sales changes from upstream to downstream i.e. parent will earn the profit and so the unrealised profit will be eliminated from parent's equity.

3)

Consolidation adjustment entry:

Unrealised profit a\c Dr. 15310

NCI a\c Dr. 3827

To stock 19137

(For unrealised please removed year 2015)

NCI Dr. 5888

Unrealised profit Dr 23553

To stock 29441

( For unrealised profit removed year 2014)