Question 1

Pre-consolidation bookkeeping, upstream intercompany sales, profits in ending inventory-Equity method

Assume that a parent company owns a 100% controlling interest in its long-held subsidiary. The following excerpts are from the parent's and subsidiary's "stand alone" pre-consolidation income statements for the year ending December 31, 2013, prior to any investment bookkeeping or intercompany adjustments:

On January 1, 2013, the 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.

Assume that during the year ended December 31, 2013, the subsidiary sold to the parent $250,000 of merchandise. At December 31, 2013, the parent still held in its inventory 25% of the goods purchased from the subsidiary during 2013. What is the amount of "income from subsidiary" recognized by the parent company if it applies the equity method of pre-consolidation investment accounting?

the correct question is $357,500, how can I get that?

Question 2

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 parent's and subsidiary's "stand alone" pre-consolidation income statements for the year ending December 31, 2013, prior to any investment bookkeeping or intercompany adjustments:

On January 1, 2013, 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.

Assume that during the year ended December 31, 2013, the parent sold to the subsidiary $250,000 of merchandise. At December 31, 2013, the subsidiary still held in its inventory 25% of the goods purchased from the parent during 2013. What is the amount of "income from subsidiary" recognized by the parent company if it applies the equity method of pre-consolidation investment accounting?

the correct answer is $360,625, how can I get that?

Subsidiary Parent $4,200,000 $2,850,000 Revenues Cost of goods sold (2,730,000) (1,710,000) Gross profit 1,470,000 1,140,000 Selling general & administrative expenses (975,000) (757,500) $495,000 $382,500 Net income Subsidiary Parent $4,200,000 $2,850,000 Revenues |(2,730,000) 1,710,000) Cost of goods sold Gross profit 1,470,000 1,140,000 Selling general & administrative expenses (757,500) (975,000) $495,000 $382,500 Net income Subsidiary Parent $4,200,000 $2,850,000 Revenues Cost of goods sold (2,730,000) (1,710,000) Gross profit 1,470,000 1,140,000 Selling general & administrative expenses (975,000) (757,500) $495,000 $382,500 Net income Subsidiary Parent $4,200,000 $2,850,000 Revenues |(2,730,000) 1,710,000) Cost of goods sold Gross profit 1,470,000 1,140,000 Selling general & administrative expenses (757,500) (975,000) $495,000 $382,500 Net income