The comparative consolidated income statements of a parent and its 80 owned subsidiary were prepared incorrectly as on December 31 and are shown in the table given below The following items were overlooked when the statements were prepared The Year 5 gain on sale of assets resulted from the subsidiary selling equipment to the parent on June 30 The parent immediately leased the equipment back to the subsidiary at an annual rental of $42,000 This was the only intercompany rent transaction that occurred each year The equipment had a remaining life of five years on the date of the intercompany sale The Year 6 gain on sale of assets resulted from the January 1 sale of a building, with a remaining life of seven years, by the subsidiary to the parent Both gains were taxed at a rate of 20 CONSOLIDATED INCOME STATEMENTS Year 5 Year 6 Miscellaneous revenues $ 864,500 $ 950,000 Gain on sale of assets 28,000 59,500 Rental revenue 21,000 42,000 913,500 1,051,500 Miscellaneous expenses 419,800 497,340 Rental expense 70,200 71,800 Depreciation expense 100,000 98,200 Income tax expense 93,500 107,000 Non controlling interest 45,000 8,160 728,500 782,500 Net income $ 185,000 $ 269,000 Required 1 Prepare correct consolidated income statements for Years 5 and 6 (8) Parent Company Corrected Consolidated Income Statements Tears 5 and 6 Year 5 Year 6 Miscellaneous Revenues Miscellaneous expense Rent expense Depreciation expense Income tax expense Total Expenses Consolidated net income Attributable to Shareholders of Parent NCI Total Calculations 2 Intercompany profits subsidiary selling (4 3 1 8) Before tax 20 tax After tax Equipment Building Intercompany Rent 3 Calculation of Consolidated Net Income (4 5 9) Year 5 Year 6 If the translation of a foreign operation produced a gain under the FCT method, the translation of the same company could produce a loss if the operation were translated under the PCT method Do you agree with this statement Explain (3)

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Posted on Jul 25, 2024

The comparative consolidated income statements of a parent and its 80%-owned subsidiary were prepared incorrectly as on December 31 and are shown in the table given below. The following items were overlooked when the statements were prepared:

The Year 5 gain on sale of assets resulted from the subsidiary selling equipment to the parent on June 30. The parent immediately leased the equipment back to the subsidiary at an annual rental of $42,000. This was the only intercompany rent transaction that occurred each year. The equipment had a remaining life of five years on the date of the intercompany sale.
The Year 6 gain on sale of assets resulted from the January 1 sale of a building, with a remaining life of seven years, by the subsidiary to the parent.
Both gains were taxed at a rate of 20%.

CONSOLIDATED INCOME STATEMENTS
		Year 5		Year 6
Miscellaneous revenues	$	864,500	$	950,000
Gain on sale of assets		28,000		59,500
Rental revenue		21,000		42,000
		913,500		1,051,500
Miscellaneous expenses		419,800		497,340
Rental expense		70,200		71,800
Depreciation expense		100,000		98,200
Income tax expense		93,500		107,000
Non-controlling interest		45,000		8,160
		728,500		782,500
Net income	$	185,000	$	269,000

Required:

1. Prepare correct consolidated income statements for Years 5 and 6. (8)

Parent Company

Corrected Consolidated Income Statements

Tears 5 and 6

Calculations:

2. Intercompany profits subsidiary selling: (4+3+1=8)

Before tax

20% tax

After tax

Equipment:

Building:

Intercompany Rent

3.Calculation of Consolidated Net Income: (4+5=9)

If the translation of a foreign operation produced a gain under the FCT method, the translation of the same company could produce a loss if the operation were translated under the PCT method. Do you agree with this statement? Explain. (3)