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Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Computing the amount of equity income and preparing [I] consolidation journal entries - Equity method
Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the
following data for the years ending 2021 and 2022:
Net
Income
2022 $640,000
2021 $480,000
Subsidiary Intercompany Gross Profit
Inventory
Sales
$0
Assume that inventory not remaining at the end of the year was sold outside of the consolidated group. The subsidiary paid $130,000 in dividends during 2022.
a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2022 assuming that it uses the equity method of accounting for its
Equity Investment?
[Icogs]
on Unsold Receivable
Inventories (Payable)
$28,800 $32,000
$40,000
b. Prepare the required [I] consolidation journal entries for 2022.
Consolidation Spreadsheet
Description
[Isales]
$80,000
$96,000 $32,000
[Icogs]
[pay]
To recognize deferred profit on prior year's sale.
#
+
+
To defer gross profit on the intercompany sale.
+
◆
Debit
0
0
0
0
0
0
0
0
Credit
0
0
0
0
0
0
0
0](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7d2d698d-09ca-4644-acfc-cb348702643f%2Ff452ef9d-9718-44c4-b736-109ae2cb546b%2F0z4zb4n_processed.png&w=3840&q=75)
Transcribed Image Text:Computing the amount of equity income and preparing [I] consolidation journal entries - Equity method
Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the
following data for the years ending 2021 and 2022:
Net
Income
2022 $640,000
2021 $480,000
Subsidiary Intercompany Gross Profit
Inventory
Sales
$0
Assume that inventory not remaining at the end of the year was sold outside of the consolidated group. The subsidiary paid $130,000 in dividends during 2022.
a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2022 assuming that it uses the equity method of accounting for its
Equity Investment?
[Icogs]
on Unsold Receivable
Inventories (Payable)
$28,800 $32,000
$40,000
b. Prepare the required [I] consolidation journal entries for 2022.
Consolidation Spreadsheet
Description
[Isales]
$80,000
$96,000 $32,000
[Icogs]
[pay]
To recognize deferred profit on prior year's sale.
#
+
+
To defer gross profit on the intercompany sale.
+
◆
Debit
0
0
0
0
0
0
0
0
Credit
0
0
0
0
0
0
0
0
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