Question

On January 1, 2021 P Co acquired 60% ownership of S Ltd. On the acquisition date all identifiable assets and liabilities had book values equal to fair values. P uses the cost method to record its investment in S. For external reporting purposes consolidated statements are required. However, the purchase did result in the creation of goodwill of $55,000. Both companies use a 35% tax rate.During the past few years, a number of transactions have taken place:

1)Inter-company downstream sales during 2025 were 200,000. An unrealized profit of 18,000 still remains in the unsold ending inventory. The beginning inventory included an unrealized profit of 9,000 related to last year's downstream inter-company sales.

2)Inter-company upstream sales during 2025 were 70,000. An unrealized profit of 8,000 remains in the unsold ending inventory. There were no inter-company upstream sales last year.

3)On January 3, 2023, P sold equipment to S for 100,000. The equipment had a net book value of $75,000 and a remaining useful life of 10 years on the date of sale.

4)On July 8, 2025, S sold land to P for $167,000. The land had a book value of $155,000. The land remained within the consolidated entity for the entire 2025 year.

5)Goodwill impairment for 2025 was 5,500.

6)The following financial information is available for the year ending Dec 31, 2025:

P S

Net Income 105,000 62,000

Dividends Paid 25,000 10,000

Required

1. Make an intercompany profit analysis schedule 2025 to show before tax, tax and after-tax impacts of intercompany inventory, land and equipment sales.(9 marks)
2. Use your schedule in part 1 above to calculate consolidated net income for 2025.Show attribution to both shareholder groups.(8 marks)
3. Assume depreciation expense for each of P and S is as follows for 2025:

• Depreciation expense (P) = 30,000
• Depreciation expense (S) = 25,000

Find consolidated depreciation expense on the consolidated income statement for 2025

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