Preparing a consolidated income statementEquity 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 $350,000 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 $200,000 and to an unrecorded patent valued at $150,000. The building asset is being depreciated over a 16-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $600,000 of intercompany sales. At the beginning of the current year, there were $40,000 of upstream intercompany profits in the parent's inventory. At the end of the current year, there were $60,000 of downstream intercompany profits in the subsidiary's inventory. During the current year, the subsidiary declared and paid $80,000 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 $1,000,000

Cost of goods sold (6,800,000) (600,000)

Gross profit 3,200,000 400,000

Income (loss) from subsidiary 37,125 -

Operating expenses (1,800,000) (270,000)

Net income $1,437,125 $130,000

a. Compute the Income (loss) from subsidiary of $37,125 reported by the parent company in its preconsolidation income statement.

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