Tern Corporation acquired an 80% interest in Harbor Corporation several years ag

Question

Tern Corporation acquired an 80% interest in Harbor Corporation several years ago when Harbor’s book values and fair values were equal. Separate company income statements for Tern and Harbor for the year ended December 31, 2005 are summarized as follows: Tern Harbor Sales Revenue $ 1,000,000 $ 600,000 Income from Harbor 80,000 Cost of Goods Sold ( 600,000 )( 300,000 ) Expenses ( 200,000 )( 200,000 ) Net Income $ 280,000 $ 100,000 During 2004 Tern sold merchandise that cost $120,000 to Harbor for $180,000. Half of this merchandise remained in Harbor’s inventory at December 31, 2004. During 2005, Tern sold merchandise that cost $150,000 to Harbor for $225,000. One-third of this merchandise remained in Harbor’s December 31, 2005 inventory. Required: Prepare a consolidated income statement for Tern Corporation and Subsidiary for 2005. Tern Corporation acquired an 80% interest in Harbor Corporation several years ago when Harbor’s book values and fair values were equal. Separate company income statements for Tern and Harbor for the year ended December 31, 2005 are summarized as follows: Tern Harbor Sales Revenue $ 1,000,000 $ 600,000 Income from Harbor 80,000 Cost of Goods Sold ( 600,000 )( 300,000 ) Expenses ( 200,000 )( 200,000 ) Net Income $ 280,000 $ 100,000 During 2004 Tern sold merchandise that cost $120,000 to Harbor for $180,000. Half of this merchandise remained in Harbor’s inventory at December 31, 2004. During 2005, Tern sold merchandise that cost $150,000 to Harbor for $225,000. One-third of this merchandise remained in Harbor’s December 31, 2005 inventory. Required: Prepare a consolidated income statement for Tern Corporation and Subsidiary for 2005.

Explanation / Answer

Consolidated Income Statement for Tern Corporation and Subsidiary for 2005 (All amounts in $) Particulars Tern Harbor Inter-Company Total Corporation Corporation Eliminations Sales 1000000 600000 -225000 1375000 Cost of Goods Sold -600000 -300000 165000 -735000 Gross Margin 400000 300000 -60000 640000 Expenses -200000 -200000 0 -400000 Net Income 200000 100000 -60000 240000 NOTES (i) Inter-company elimination from sales is the sale value of merchandise sold by Tern to Harbor. (ii) Income from Harbor will not be included in the consolidated income statement, since it is correspondingly an expense in Harbor's books. (iii) Cost of Goods Sold eliminated is worked out as under : Opening Inventory from 2004 sales remaining in Harbor's books 90000 1/2 of 180,000 Sales from Tern to Harbor at Cost Price 150000 Less : Closing Inventory from 2005 sales remaining in Harbor's books -75000 1/3 of 225,000

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