A parent sells merchandise to its 90%-owned subsidiary at a markup of 20% on cost. The parent's beginning inventory includes $120,000 purchased from the subsidiary. The parent's ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on equity in net income, reported on the parent's books, assuming the parent uses the complete equity method?

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Quizplus · Accepted Answer

Confirmed profit on beginning inventory is $120,000 - ($120,000/1.2) = $20,000; unconfirmed profit on ending inventory is $156,000 - ($156,000/1.2) = $26,000. This is a downstream sale so ($26,000 - $20,000) = $6,000 is subtracted from equity in net income.

A Parent Sells Merchandise to Its 90%-Owned Subsidiary at a Markup