Question

E 5-8 Consolidated income statement with downstream sales The separate incomes (which do not include investment income) of Pat Corporation and Sal Corporation, its 80 percent-owned subsidiary, for 2011 were determined as follows (in thousands): Pat Sal Sales $1,600 $400 Less: Cost of sales 800 160 Gross profit 800 240 Other expenses 400 120 Separate incomes $ 400 $120 During 2011, Pat sold merchandise that cost $80,000 to Sal for $160,000, and at December 31, 2011, half of these inventory items remained unsold by Sal. REQUIRED: Prepare a consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

Answer 1

Consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

(in thousands)

Sales $1,600+$400-$160 $1,840

Less: Cost of sales $800+$160-$160+$40 ($840)

Gross profit $1,000

Other expenses $400 + $120 ($520)

Incomes $480

Step-by-step explanation:

The Consolidation Process is always 100% of Parent plus the 100% of the Subsidiary. Make sure to eliminate all intragroup transactions.

Thus, first eliminate intragroup transactions as follows

Eliminate Intragroup Sale :

Revenue $160,000 (debit)

Cost of Goods Sold $160,000 (credit)

Eliminate the unrealized profit in closing inventory :

Cost of Goods Sold $40,000 (debit)

Inventory $40,000 (credit)

Then prepare consolidated income statement as follows :

Consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

(in thousands)

Sales $1,600+$400-$160 $1,840

Less: Cost of sales $800+$160-$160+$40 ($840)

Gross profit $1,000

Other expenses $400 + $120 ($520)

Incomes $480