Question 2 (42.5 marks)

A- The income statement of Palermo Corporation showed a net income of $1,400,000 for the year ended December 31, 2019, before recording any income from its 75% owned subsidiary; Santana. The income statement of Santana for 2019 showed a net income of $280,000. During 2019, an intercompany sale of welding machine resulted in a gain of $14,000, and the machine was assumed to have a four-year remaining useful life with no residual value. The machine is depreciated on a Straight-line basis.

Required:

1. Calculate Palermo's consolidated net income for 2019, and controlling share of consolidated net income for 2019, assuming it was a downstream sale,

2. Calculate Palermo's consolidated net income for 2019, and controlling share of consolidated net income for 2019, assuming it was an upstream sale

3. Comment on the results, to indicate the difference between downstream sale and upstream sale.