Assume that a parent company acquired 80% of a subsidiary on January 1, 2014. Th

Question

Assume that a parent company acquired 80% of a subsidiary on January 1, 2014. The purchase price was $175,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned entirely to an unrecorded Patent owned by the subsidiary. The assumed economic useful life of the patent is 10 years.

Assume that subsidiary sells inventory to the parent. The parent, ultimately, sells the inventory to customers outside of the consolidated group. You have complied the following data for the years ending 2015 and 2016 related with intra-entity inventory sales.

Inventory Sales

Gross Profit Remaining in Unsold Inventory

2016

$103,300

$29,441

2015

$87,900

$19,137

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The unsold part will be sold to unaffiliated entities in the following year. The parent company applies equity method for this investment.

Subsidiary reports $216,930 as net income on its income statement for the year of 2016.

1. Show the computation to yield the pre-consolidation balance for Equity income in subsidiary (appeared under parent company’s income statement) during 2016.

2. If the intra-entity sales changes from upstream to downstream, then how would the balance change for Equity income in subsidiary during 2016.

3. Show the consolidation adjustment entries related to intra-entity inventory sales.

Inventory Sales

Gross Profit Remaining in Unsold Inventory

2016

$103,300

$29,441

2015

$87,900

$19,137

Explanation / Answer

1.

Excess paid $175000 which has been adjusted by assigned unrecorded patent by subsidary

Internal transaction :  Inventory from subidary to parent to outside customer

profit on unsold inventory 2015 : $19137

2016 : $29441

Total Income of subsidary for 2016 = $216930

Net recognized income of subsidary : 216930-29441+19137 =206626

Share of parent Company : 80% of 227234 = 165300.80

It is Upstream intra entity sales

2.

If it is changed to down stream mean from parent to subsidary then profit calucation will be same but no need to apply %holding beacuase it is in hand of controling entity.

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