Ibis’ separate income (excluding Lake) was $900,000, 850,000 and 950,000 in 2003

Question

Ibis’ separate income (excluding Lake) was $900,000, 850,000 and 950,000 in 2003, 2004 and 2005 respectively. Ibis sold inventory to Lake during 2003 at a gross profit of $40,000 and 30 percent remained at Lake at the end of the year. The remaining 30 percent was sold in 2004. At the end of 2004, Ibis has $25,000 of inventory received from Lake from a sale of $200,000 which cost Lake $160,000. There are no unrealized profits in the inventory of Ibis or Lake at the end of 2005. Ibis uses the equity method in its separate books. Select financial information for Lake follows: 2003 2004 2005 Sales $ 800,000 $ 850,000 $ 950,000 Cost of Sales 420,000 440,000 500,000 Gross Profit 380,000 410,000 450,000 Operating Expenses 300,000 320,000 380,000 Net Income 80,000 90,000 70,000 Required: Prepare a schedule to determine Ibis Corporation’s net income for 2003, 2004, and 2005. Ibis’ separate income (excluding Lake) was $900,000, 850,000 and 950,000 in 2003, 2004 and 2005 respectively. Ibis sold inventory to Lake during 2003 at a gross profit of $40,000 and 30 percent remained at Lake at the end of the year. The remaining 30 percent was sold in 2004. At the end of 2004, Ibis has $25,000 of inventory received from Lake from a sale of $200,000 which cost Lake $160,000. There are no unrealized profits in the inventory of Ibis or Lake at the end of 2005. Ibis uses the equity method in its separate books. Select financial information for Lake follows: 2003 2004 2005 Sales $ 800,000 $ 850,000 $ 950,000 Cost of Sales 420,000 440,000 500,000 Gross Profit 380,000 410,000 450,000 Operating Expenses 300,000 320,000 380,000 Net Income 80,000 90,000 70,000 Required: Prepare a schedule to determine Ibis Corporation’s net income for 2003, 2004, and 2005.

Explanation / Answer

Add: Gross profit of lake

Less: Intra entry profit

The gross profit earned by the intra entity sale of inventory to Lake is eliminated in the year 2003.

In the year 2004 the intra entity purchases made of $25,000 will be eliminated from the purchases and ending inventory at the end of the year, which does not have any effect on the profit of the Ibis corporation.

In the year 2005 the Ibis Corporation has sold the inventory to outside parties therefore the profit has been realized in the year and no adjusting entry will be made.

In the consolidated statement following adjustments will be made

in the year 2003 the gross profit of $40,000 will be eliminated from the consolidated profits.

in the year 2004 the sales and purchases will be eliminated by $25,000 and ending inventory will be adjusted witht the amount of unrealized profit of $5,000. The profit of $5,000 [($25,000/$200,000*160,000)-$25,000].

Financial statement of Ibis 2003 2004 2005 Separate Income $        900,000 $        850,000 $        950,000

Add: Gross profit of lake

Less: Intra entry profit

$ 40,000 Sales of inventory to Lake $ (40,000) $ -   $ -   Net profit after adjusting intra entity profits $        860,000 $        850,000 $        950,000

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