Question
Assume a parent company owns a 100% controlling interest in its long-held subsidiary. The following excerpts are from the parents and subsidiarys stand-alone pre-consolidation income
Assume a parent company owns a 100% controlling interest in its long-held subsidiary. The following excerpts are from the parents and subsidiarys stand-alone pre-consolidation income statements for the year ending in December 31, 2019, prior to any investment bookkeeping or intercompany adjustments.
| Parent | Subsidiary |
Revenues | 4,000,000 | 2,500,000 |
Cost of goods sold | (2,800,000) | (1,500,000) |
Gross profit | 1,200,000 | 1,000,000 |
Selling general & administrative expenses | (780,000) | (606,000) |
Net income | 420,000 | 394,000 |
On January 1, 2019, neither company held any inventories purchased from the other affiliate. All of the sales made by either company have the same gross margin regardless of whether they are made to affiliate or non-affiliates. The subsidiary declared and paid $200,000 of dividends during 2019.
3. Assume during the year ended December 31, 2019, a subsidiary sold to its parent $400,000 of merchandise. At December 31, 2019, the parent still held in its inventory 25% of the goods purchased from the parent during 2019. What is the amount of income from subsidiary recognized by the parent company if it applies the cost method of pre-consolidation investment bookkeeping?
a) 160,000
b) 200,000
c) 354,000
d) 356,500
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