Sub Company sells all its output at 20 percent above cost to Par Corporation.Par purchases all its inventory from Sub.The incomes reported by the companies over the past three years are as follows:
Sub Company sold inventory for $300,000,$262,500 and $337,500 in the years 2006,2007,and 2008 respectively.Par Company reported ending inventory of $105,000,$157,500 and $180,000 for 2006,2007,and 2008 respectively.Par acquired 70 percent of the ownership of Sub on January 1,2006,at underlying book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.

-Based on the information given above,what will be the consolidated net income for 2007?

Question

Sub Company sells all its output at 20 percent above cost to Par Corporation.Par purchases all its inventory from Sub.The incomes reported by the companies over the past three years are as follows:
Sub Company sold inventory for $300,000,$262,500 and $337,500 in the years 2006,2007,and 2008 respectively.Par Company reported ending inventory of $105,000,$157,500 and $180,000 for 2006,2007,and 2008 respectively.Par acquired 70 percent of the ownership of Sub on January 1,2006,at underlying book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.
 
-Based on the information given above,what will be the consolidated net income for 2007?

Quizplus · Accepted Answer

To find the consolidated net income, we need to first find the net income of each company separately.

For Sub Company:
- Cost of inventory sold in 2006 = $300,000/1.2 = $250,000
- Cost of inventory sold in 2007 = $262,500/1.2 = $218,750
- Cost of inventory sold in 2008 = $337,500/1.2 = $281,250

Therefore, the gross profit for Sub Company:
- In 2006 = $50,000
- In 2007 = $43,750
- In 2008 = $56,250

For Par Company:
- Cost of inventory purchased in 2006 = $105,000/0.7 = $150,000
- Cost of inventory purchased in 2007 = $157,500/0.7 = $225,000
- Cost of inventory purchased in 2008 = $180,000/0.7 = $257,142.86
(Note: We need to divide by 0.7 to get the full cost of inventory, since Par only owns 70% of Sub)

Therefore, the cost of goods sold for Par Company:
- In 2006 = $250,000
- In 2007 = $218,750
- In 2008 = $281,250

The gross profit for Par Company:
- In 2006 = $50,000 (since Par purchases at 20% above cost)
- In 2007 = $43,750
- In 2008 = $56,250

To find the consolidated net income for 2007, we need to add the net income of both companies and eliminate any intercompany transactions. Since Par purchases all its inventory from Sub, we need to eliminate the gross profit made by Sub on sales to Par.

Consolidated gross profit for 2007 = $43,750 (from Sub) + $0 (from Par, since we eliminate the gross profit on sales from Sub) = $43,750
Consolidated cost of goods sold for 2007 = $218,750 (from Sub) + $218,750 (from Par, which is equal to Par's inventory at the end of 2006) = $437,500

Consolidated net income for 2007 = Consolidated gross profit - Consolidated cost of goods sold = $43,750 - $437,500 = -$393,750

However, we need to adjust for the fair value of the noncontrolling interest. Since the noncontrolling interest is equal to 30% of Sub's book value, we need to calculate Sub's book value first.

Sub Company's book value on January 1, 2006:
- Cost of inventory sold in 2006 = $250,000
- Plus: Ending inventory at 12/31/05 = $0
- Total book value = $250,000

Noncontrolling interest's fair value on January 1, 2006:
- 30% of Sub's book value = 0.3 x $250,000 = $75,000

Therefore, we need to deduct $75,000 from the consolidated net income calculated above to get the adjusted consolidated net income.

Adjusted consolidated net income for 2007 = -$393,750 - $75,000 = -$468,750

(Note: The negative result indicates a loss for the consolidated entity for that year)

Sub Company Sells All Its Output at 20 Percent Above