Problema 6-5

The consolidated statement income statement of a parent and its 80%-owned subsidiary appears below.

It was prepared by na accounting student before reading this chapter.

CONSOLIDATED INCOME STATEMENT

Sales

$500,000

Rental revenue

24,000

Interest revenue

50,000

Total revenue

$574,000

COGS

350,000

Rent expense

24,000

Interest expense

35,000

Adm expenses

45,000

Income tax expense

42,000

Noncontrolling interest in profit

9,000

Total costs and expenses

505,000

Profit

$69,000

The following items were overlooked when the statement was prepared:

-

The opening inventory of the parent contained inventory purchased from the subsidiary with and intercompany

profit of $5,000. This inventory was sold by the parent during the current year.

-

During the year, intercompany sales (at 40% gross profit rate) were made as follows:

By the parent to the subsidiary

$100,000

By the subsidiary to the parent

80,000

-

At the end of the year, half of the items purchased from the parent reamined in the inventory of the subsidiary

and none of the inventory purchase from the subsidiary reamined in the parent's inventory.

-

All of the rental revenue and 60% of the interest revenue were intercompany and appeard on the income statement

of the parent.

-

Assume a 40% rate for income tax.

Required

(a)

Prepare a correct consolidated income statement

(b)

Use the matching principle to explain the adjustments for unrealized profits on intercompany sales when preparing

consolidated financial statements.