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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 pre-consolidation financial statements and the consolidated financial statements for the year ending December 31, 2016:
| Parent | Subsidiary | Consolidated | |||
|---|---|---|---|---|---|
| Income Statement | |||||
| Revenues | $3,360,000 | $2,280,000 | $4,920,000 | ||
| Cost of goods sold | (2,184,000) | (1,368,000) | (2,834,100) | ||
| Gross profit | 1,176,000 | 912,000 | 2,085,900 | ||
| Income from subsidiary | 183,900 | – | |||
| Selling, general & administrative expenses | (960,000) | (726,000) | (1,686,000) | ||
| Net income | $399,900 | $186,000 | $399,900 | ||
| Statement of retained earnings | |||||
| Retained earnings, January 1 | $240,000 | $220,000 | $240,000 | ||
| Net income | 399,900 | 186,000 | 399,900 | ||
| Dividends declared | (72,000) | (54,000) | (72,000) | ||
| Retained earnings, December 31 | $567,900 | $354,000 | $567,900 | ||
| Balance Sheet | |||||
| Cash | $72,000 | $48,000 | $120,000 | ||
| Accounts receivable | 144,000 | 90,000 | 195,600 | ||
| Inventories | 156,000 | 108,000 | 245,100 | ||
| Investment in Subsidiary | 785,100 | – | |||
| Property, plant & equipment | 1,020,000 | 744,000 | 1,764,000 | ||
| Goodwill | 0 | 0 | 60,000 | ||
| Total assets | $2,177,100 | $990,000 | $2,384,700 | ||
| Accounts payable | $96,000 | $66,000 | $123,600 | ||
| All other liabilities | 360,000 | 180,000 | 540,000 | ||
| Common stock & APIC | 1,153,200 | 390,000 | 1,153,200 | ||
| Retained earnings | 567,900 | 354,000 | 567,900 | ||
| Total liabilities and equity | $2,177,100 | $990,000 | $2,384,700 | ||
The parent sold inventories to the subsidiary during both 2015 and 2016. For these sales to the subsidiary, the parent earns a gross profit of 35%.
1. What is the amount of intercompany sales between the parent and subsidiary during the year ending December 31, 2016?
A. $2,184,000
B. $1,896,000
C. $720,000
D. $717,900
2. What is the amount of parent-company profit from intercompany inventory transactions that was in the subsidiary’s ending inventory on December 31, 2016?
A. $54,600
B. $37,800
C. $18,900
D. $16,800
3. What is the amount of parent-company profit from intercompany inventory transactions that was in the subsidiary’s beginning inventory on January 1, 2016?
A. $37,800
B. $18,900
C. $16,800
D. Not enough information
4. What is the amount of intercompany transactions between the parent and subsidiary that remained unpaid at December 31, 2016?
A. $38,400
B. $18,900
C. $16,800
D. $2,100
Expert Answer
| Answer =1) | ||
| Particulars | Amount | |
| Sales of Parent Company | $33,60,000 | |
| Sales of Subsudiary Company | $22,80,000 | |
| Total | $56,40,000 | |
| Less : Shown in Consolidation | $49,20,000 | |
| Difference | $7,20,000 | |
| Answer = Option c = $ 720,000 | ||
| Answer = 2) | ||
| Particulars | Amount | |
| Closing Inventory of Parent Company | $1,56,000 | |
| Closing inventory of Subsidiary Company | $1,08,000 | |
| Total | $2,64,000 | |
| Less : Shown in Consolidation | $2,45,100 | |
| Difference | $18,900 | |
| Answer = Option c = $ 18,900 | ||
| Answer = 3) | ||
| There is no purcahse and opening stock is given for calculate the profit on | ||
| opening stock | ||
| Answer = Option D = Not enough information | ||
| Answer = 4) | ||
| Particulars | Amount | |
| Closing Account Payable Parent Company | $96,000 | |
| Closing Account Payable of Subsidiary Company | $66,000 | |
| Total | $1,62,000 | |
| Less : Shown in Consolidation | $1,23,600 | |
| Difference | $38,400 | |
| Answer = Option A = $ 38,400 | ||
