Question

Akron, Inc., owns all outstanding stock of Toledo Corporation. Amortization expense of $15,000 per year for patented technology resulted from the original acquisition. For 2018, the companies had the following account balances:

Akron Toledo
Sales . . . . . . .. $1,100,000 $600,000
Cost of goods sold 500,000 400,000
Operating expenses 400,000 220,000
Investment income . . Not given –0–
Dividends declared . . .80,000 30,000
Intra-entity sales of $320,000 occurred during 2017 and again in 2018. This merchandise cost $240,000 each year. Of the total transfers, $70,000 was still held on December 31, 2017, with
$50,000 unsold on December 31, 2018.
a. For consolidation purposes, does the direction of the transfers (upstream or downstream) affect
the balances to be reported here?
b. Prepare a consolidated income statement for the year ending December 31, 2018.

Answer 1

A. Yes

B. $170,000

Step-by-step explanation:

A. Yes For consolidation purposes, the direction of the transfers for either upstream or downstream does affect the balances to be reported here reason been that when calculating the noncontrolling interest balances in a situation where it is present we have to taken into consideration the deferral of unrealized gross profits on upstream sales where Downstream on the other hand are assigned to the parent in which they will be viewed as if they have no any impact on the outside interest.

B. Preparation of a consolidated income statement for the year ending December 31, 2018

AKRON, INC. AND CONSOLIDATED SUBSIDIARY

Income Statement Year Ending December 31, 2018

Sales $1,380,000

[1,100,000+(600,000-320,000)

Less Cost of goods sold ($575,000)

(500,000+50,000+15,000)

Gross profit $805,000

($1,380,000-$1,380,000)

Operating expenses 635,000

(400,000+220,000+15,000)

Consolidated net income $170,000

($805,000-635,000)

Therefore Consolidated net income will be $170,000