Palermo Corporation acquired an 80% interest in Steel Corporation at a cost equal to 80% of the book value of Steel's net assets several years ago. At the time of purchase, the fair value and book value of Steel's assets and liabilities were equal. Palermo purchases its entire inventory from Steel at 150% of Steel's cost. During 2020, Steel sold $490,000 of merchandise to Palermo. Palermo's beginning and ending inventories for 2020 were $72,000 and $66,000, respectively. Income statement information for both companies for 2020 is as follows: Palermo Steel Sales Revenue $ 820,000 $440,000 Income from Steel 145,600 Cost of Goods Sold (460,000) (165,000) Expenses (120,000) (95,000) Net Income $ 385,600 $ 180,000 Required: Prepare a consolidated income statement for Palermo Corporation and Subsidiary for 2020. Determine which consolidated income statement items would (or would not) change if Palermo were the seller and Steel was the buyer. Explain why.
Palermo Corporation acquired an 80% interest in Steel Corporation at a cost equal to 80% of the book value of Steel's net assets several years ago. At the time of purchase, the fair value and book value of Steel's assets and liabilities were equal. Palermo purchases its entire inventory from Steel at 150% of Steel's cost. During 2020, Steel sold $490,000 of merchandise to Palermo. Palermo's beginning and ending inventories for 2020 were $72,000 and $66,000, respectively. Income statement information for both companies for 2020 is as follows:
Palermo Steel
Sales Revenue $ 820,000 $440,000
Income from Steel 145,600
Cost of Goods Sold (460,000) (165,000)
Expenses (120,000) (95,000)
Net Income $ 385,600 $ 180,000
Required:
- Prepare a consolidated income statement for Palermo Corporation and Subsidiary for 2020.
Determine which consolidated income statement items would (or would not) change if Palermo were the seller and Steel was the buyer. Explain why.
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