Question

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8.
1. Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?
a. $62,000
b. $120,000
c. $90,000
d. $58,000
2. Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?
a. $62,000
b. $120,000
c. $90,000
d. $58,000
3. Based on the information given above, what amount of consolidated net income will be assigned to the controlling shareholders for 20X8?
a. $58,000
b. $59,000
c. $55,000
d. $52,200

Answer 1

Answer:

1. b. $120,000

2. a. $62,000

3. a. $58,000

Explanation:

1. Since the Subsidiary has sold the entire inventory to an unaffiliated company on November 21, 20X8, Then the sales to the group will be the amount at which a third party has bought it which is $120,000

2. Since the Parent had produced the inventory which has now been entirely sold out of the group,  for $62,000. then the cost of goods sold to the group is the amount at which the parent produced it.

When the group is being consolidated all inter-company profits and transfer costs are eliminated and ignored to get the true picture of the transactions at arms length.

3. The consolidated amount of net income will be the amount at which the group bought it less the amount at which they sold it which is $120,000 - $62,000 = $58,000