On January 1, Year 8, Fazli Co. acquired all of the common shares of Gervais. The following transactions occurred in January and February, Year 8: On January 10, Gervais purchased $10,000 of inventory from outsiders. On January 20, Gervais sold $6,000 of this inventory to Fazli for $7,200, which represents a markup of 20% over cost. On January 30, Fazli sold $5,000 of the inventory purchased from Gervais to outsiders for $6,250, which represents a markup of 25% over cost. On February 10, Gervais purchased $12,000 of inventory from outsiders. On February 20, Gervais sold $9,000 of inventory to Fazli for $10,800, which represents a markup of 20% over cost. On February 30, Fazli sold $8,500 of inventory purchased from Gervais to outsiders for $10,625, which represents a markup of 25% over cost. Fazli uses the cost method to account for its investment in Gervais. Both companies pay income tax at the rate of 40%. Gervais did not pay any dividends in Year 8.

(a) Prepare income statements for January and February for Fazli, Gervais, and Consolidation. Break down cost of sales into its three components.

(b) Now assume that Fazli uses the equity method to account for its investment in Gervais. What accounts would change on the three statements in January and what would be the account balance?

(c) Now assume that Fazli only owns 80% of the common shares of Gervais and uses the cost method to account for its investment in Gervais. What accounts would change (as compared to part (a)) on the three statements in January and what would be the account balance?

(d) Now assume that Gervais was the parent, Fazli was the subsidiary, and Gervais owned 80% of Fazli. How would this change the allocation of consolidated net income for January?