Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.
-Based on the preceding information,what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach?
A) $210,000
B) $202,000
C) $160,000
D) $200,000

Question

Quizplus · Accepted Answer

Under the proprietary theory approach, consolidated net income is calculated by adding the parent company's net income to the subsidiary's net income, adjusted for intercompany transactions. Small-Town's net income would be $160,000 (sales of $450,000 - expenses of $290,000), and Supplier's net income would be $60,000 (sales of $300,000 - expenses of $240,000). Since Small-Town owns 70 percent of Supplier, it would include 70 percent of Supplier's net income in its consolidated income statement, which is $42,000 (70% x $60,000). Adding Small-Town's net income of $160,000 to the portion of Supplier's net income included in the consolidated statement of $42,000 results in a consolidated net income of $202,000 ($160,000 + $42,000).

Small-Town Retail Owns 70 Percent of Supplier Corporation's Common Stock