On the acquisition day, Jan.1, 2019, Parent acquired 80% ownership of Sub for $ 528,000. On that day, Sub had the followings:

Acquisition differentials

Inventory 5,000 Dr.

Machines (average 10 year useful life) 20,000 Dr

Bank loan (5 years useful life) (5,000) Cr

Goodwill 60,000 Dr.

For 2019, the two companies have the following income statements:

Parent Sub

Sales $ 900,000 $ 700,000

Cost of Sales 500,000 420,000

Gross profit 400,000 280,000

Gain on sales of machine 4,680

Gain on sales of investments 9,000

Dividends from Sub 15750

Expenses:

Amortization of equipment & building 11,000 8,000

Bad debts 15,000 29,000

Interest on long term debt 8,000 6,000

Other expenses including taxes 94,000 66,000

Net income for the year 296,750 175,680

Additional information:

• On July 1, 2019, the sub sold Parent a machine for $53,480 cash. This machine was purchased on Jan. 1, 2014 at a price of $62,000. At that time, the machine was estimated to have a useful life of 25 years and a residual value of $2,000. Parent agreed on the estimated useful life and residual value.
• During 2019, Sub sold inventories to Parent and earned sales of $140,000 from this transaction. On Dec 31, 2019, 10% of the purchased inventories remained in Parents account.
• On July 1, Parent sold some shares of Sub for $75,000 cash, which brought its interest down to 70%.
• Both companies have an income tax rate of 40%.
• Parent applies entity theory for consolidation
• Ignore income tax for the gain on sales of investments.

Required:

1. Prepare consolidated income statement for 2019.
2. Show all the adjustments you need to make in order to obtain the consolidated balance sheet as of Dec 31, 2019.

A part of the solution

1. Parents portion in consolidated net income = $394,688.
2. NCI which is reported on the consolidated balance sheet as of Dec 31, 2019 = $240,325.2