Question
Pre-consolidation bookkeeping, downstream intercompany sales, profits in ending inventory-Equity method Assume a parent company owns a 100% controlling interest in its long-held subsidiary. The following
Pre-consolidation bookkeeping, downstream intercompany sales, profits in ending inventory-Equity method
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 December 31, 2022, prior to any investment bookkeeping or intercompany adjustments:
Parent | Subsidiary | |
---|---|---|
Revenues | $5,200,000 | $3,250,000 |
Cost of goods sold | (3,640,000) | (1,950,000) |
Gross profit | 1,560,000 | 1,300,000 |
Selling general & administrative expenses | (1,014,000) | (787,800) |
Net income | $546,000 | $512,200 |
On January 1, 2022, 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 affiliates or non-affiliates. The subsidiary declared and paid $260,000 of dividends during 2022.
Assume that during the year ended December 31, 2022, the parent sold to the subsidiary $650,000 of merchandise. At December 31, 2022, the subsidiary still held in its inventory 25% of the goods purchased from the parent during 2022. What is the amount of income from subsidiary recognized by the parent company if it applies the equity method of pre-consolidation investment bookkeeping?
A. $463,450
B. $560,950
C. $546,000
D. $512,200
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