Computing the amount of investment income and preparing [l] consolidation entrie

Question

Computing the amount of investment income and preparing [l] consolidation entries-Cost method Assume that a wholly owned subsidiary sells inventory to the parent company. The parent company, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2015 and 2016: Subsidiary Net Income Intercompany Inventory Sales $135,000 $90,000 Remaining at End of Year Gross Profit % 34% 30% Receivable (Payable) $45,000 $36,000 2016 $900,000 15% 2015 $720,000 1896 Assume that inventory not remaining at the end of the year was sold outside of the consolidated group during the year. The subsidiary paid $675,000 in dividends during 2016. a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2016 assuming that it uses the cost method of accounting for its Equity Investment? $ 0 b. Prepare the required [] consolidation entries for 2016. Consolidation Journal Description Debit Credit [lcogs) To recognize prior year profit on intercompany sales To eliminate intercompany sales To defer current period profit on intercompany sales. lpay] To eliminate intercompany receivables/payables.

Explanation / Answer

1. Income to be reported = Subsidiary Net Income 2016 + 2015 Inventory Sales Profit - 2016 Inventory sales Profit

Income to be reported = 900000 + 90000 * 30% - 135000 * 34%

Income to be reported = $881100

2. Journal Entries are as Follows

a. to recognize prior yearprofit

Debit Investment in Subsidiary 27000

Credit Cost of Goods Sold $27000

b. to eliminate inter company sales

Debit Sales $135000

Credit Cost of Goods SOld $135000

c. To defer current period profit

Debit Cost of Goods Sold 45900

Credit Inventory $45900

d. To eliminate inter company receivables

Debit Accounts Payable 45000

Credit Accounts Receivable 45000

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