A parent owns 80% of its subsidiary and sells merchandise to its subsidiary at a 25% markup on cost. The subsidiary's ending inventory includes $825,000 purchased from the parent. The subsidiary's beginning inventory includes $750,000 purchased from the parent. What is the effect of the above on the parent's equity in net income of the subsidiary for the current year?

Question

Quizplus · Accepted Answer

Ending inventory profit = $825,000 - ($825,000/1.25) = $165,000 unconfirmed
Beginning inventory profit = $750,000 - ($750,000/1.25) = $150,000 confirmed
$150,000 - $165,000 = $15,000 decrease.

A Parent Owns 80% of Its Subsidiary and Sells Merchandise