The answer is NOT 225,000 or 90,000 Computing the amount of investment income an

Question

The answer is NOT 225,000 or 90,000

Computing the amount of investment income and preparing [] 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: Inventory Subsidiary Net Intercompany Remaining at Receivable Inventory Sales Gross Profit % 3496 3096 Income End of Year (Payable) 15% $45,000 86 $36,000 2016 $900,000 135,000 2015 $720,000 90,000 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? $222.975

Explanation / Answer

2016

Profit on inter- sale : 34% on 135000 = 45900

Profit from subsidiary to report

= Parent's share in Net Income of subsidiary. i.e. 900000

(-) Profit on intersale i.e. 45900

=854100

The amount of Cash dividend will be reduce from the Value of Investment in the books of Parent. The same is treated as return of capital.

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