Exercise 1 (LO 1, 2) Gross profit: separate firms versus consolidated. Sorel is

Question

Exercise 1 (LO 1, 2) Gross profit: separate firms versus consolidated. Sorel is an 80%-owned subsidiary of Pattern Company. The two affiliates had the following separate income statements for 2015 and 2016.

Sorel sells at the same gross profit percentage to all customers. During 2015, Sorel sold goods Pattern for the first time in the amount of $120,000. $30,000 of these sales remained in Pattern's ending inventory. During 2016, sales to Pattern by Sorel were $150,000, of which $25,000 sales were still in Pattern's December 31, 2016, inventory.

Prepare consolidated income statements including the distribution of income to the controlling and noncontrolling interest for 2015 and 2016.

Sorel Company Pattern Company 2015 2016 2015 2016 Sales Revenue 250,000 350,000 500,000 540,000 Cost of Good Sold 150,000 210,000 310,000 360,000 Gross Profit 100,000 140,000 190,000 180,000 Expenses 45,000 66,000 120,000 125,000 Net Income 55,000 74,000 70,000 55,000

Explanation / Answer

Gross profit % of Sorel in 2015= GP/revenue*100

                                                     = 100000/250000*100

                                                          =40%on sales price

Gross profit % in 2016= 140000/350000*100

                                                = 40% on sales

Unrealised profit on unsold stock 2015=30000*40/100

=12000

Unrealised profit for 2016=25000*40/100

                                                   =10000

Consolidated income statement:

Note: in consolidated FS intercompany sale and COGS are excluded.

Sales=250000+500000-120000 = 630000

COGS=150000+310000-60%of120000=388000

(same for 2016)

#individual income of Sorel:(2015)

Net income=55000- share of minority in unrealised profit(12000*20/100)

=55000-2400

=52600

#52600 will be distributed in 80% to controllig and 20% to minority

individual income of Sorel:(2016)

Net income=74000-minority share in unrealised profit(10000*20/100)

=74000-2000 = 72000

72000$distributed in80:20ratio

             2,015          2,016 Sales          750,000     890,000 less: intercompany sale       (120,000) (150,000) net sales          630,000     740,000 COGS(exclude cost of intercompany sale)          388,000     480,000 Unrealised profit            12,000        10,000 Gross profit          230,000     250,000 Expenses          165,000     191,000 Net income            65,000        59,000

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