Preparing a consolidated income statement$$Equity method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits

A parent company purchased a $70\%$ controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $$875,000$ in excess of the subsidiary$$s Stockholders$$ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $$500,000$ and to an unrecorded patent valued at $$375,000.$ The building asset is being depreciated over a $20-$year period and the patent is being amortized over an $10-$year period, both on the straight$-$line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $$1,500,000$ of intercompany sales. At the beginning of the current year, there were $$100,000$ of upstream intercompany profits in the parent$$s inventory. At the end of the current year, there were $$150,000$ of downstream intercompany profits in the subsidiary$$s inventory. During the current year, the subsidiary declared and paid $$200,000$ of dividends. The parent company uses the equity method of pre$-$consolidation investment bookkeeping. Each company reports the following income statement for the current year:

Parent Subsidiary Income statement: Sales $$10,000,000$ $$2,500,000$ Cost of goods sold $(6,800,000)(1,500,000)$ Gross profit $3,200,0001,000,000$ Income $($loss$)$ from subsidiary $103,750-$ Operating expenses $(1,800,000)(675,000)$ Net income $$1,503,750$ $$325,000$

a$.$ Compute the Income $($loss$)$ from subsidiary of $$103,750$ reported by the parent company in its preconsolidation income statement.

Do not use negative signs with your answers below.

Subsidiary's net income AAP Upstream sales Adjusted subsidiary income P $\%$ of interest X $\%$ Downstream sales Income $($loss$)$ from subsidiary

b$.$ Prepare the consolidated income statement for the current year.

Do not use negative signs with your answers below.

Consolidated Income Statement Sales Cost of goods sold Gross profit Operating expenses