Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2021 and 2022:

	Subsidiary Net Income	Intercompany Inventory Sales	Gross Profit on Unsold Inventories	Receivable (Payable)
2022	$640,000	$80,000	$28,800	$32,000
2021	$480,000	$96,000	$32,000	$40,000

Assume that inventory not remaining at the end of the year was sold outside of the consolidated group. The subsidiary paid $130,000 in dividends during 2022.

a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2022 assuming that it uses the equity method of accounting for its Equity Investment?

$Answer

b. Prepare the required [I] consolidation journal entries for 2022.

Consolidation Spreadsheet
Description		Debit	Credit
[Icogs]	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	To recognize deferred profit on prior year's sale.
[Isales]	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
[Icogs]	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	To defer gross profit on the intercompany sale.
[Ipay]	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold
	Accounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold