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Assume a parent company acquires 80% of the outstanding voting common stock of a subsidiary on...

Assume a parent company acquires 80% of the outstanding voting common stock of a subsidiary on January 1, 2018. One the acquisition date, the identifiable net assets of the subsidiary had fair value that approximately their recorded book value except for a paten, which had a fair value of $200,000 and not recorded book value. On the date of acquisition, the patent had five years of remaining useful life and the parent company amortizes its intangible assets using straight line amortization. During the year ended December 31, 2019, the subsidiary recorded sales to the parent in the amount of $240,000. On these sales, the subsidiary recorded pre-consolidation gross profits equal to 25%. Approximately 30% of this merchandise remains in the parent’s inventory at December 31, 2019. The following summarized pre-consolidation financial statements are for the parent and the subsidiary for the year ended December 31, 2019

Income Statement Investor Investee
Revenue 4800000 800000
Income from Investee 209600 00
Expenses -3200000 -480000
Net Income 1809600 320000
Statement of Retained Earnings
Beginning Retained Earnings 1488000 80000
Net Income 1809600 320000
Dividends declared -128000 -80000
Ending Retained Earnings 3169600 320000
Balance Sheet
Current Assets 1600000 200000
Equity Investment 465600 00
Non Current Assets 8000000 600000
Total Assets 10065600 800000
Liabilities 5280000 320000
Common Stock & APIC 1800000 160000

Retained Earnings

 3169600 320000

10019600 800000

Intercompany Inventory Transaction, What are the consolidated Revenues?

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Answer #1

Consolidated Revenue includes Parent companies revenue plus Subsidiary companies revenue less intra group Transactions.

as parent company has a sales revenue of $4800000 and subsidiary company has a sales revenue of $800000.

intra group transaction = $240000

Consolidated Revenue will be $5360000 ($4800000+$800000-$240000)

Here, question only asks about consolidated Revenue so, no need to bother about Unrealaised profit and other calculations.

When preparing consloidated Finacial Statements intra grouptransaction should be eliminated and unrealised profit should be calculated and added to Cost of goods sold.

Unrealaised profit = 240000*.25*.3 =18000. it should be added to cost of goods sold (SOPL) and deducted from inventoy balance in the SOFP

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