A parent company purchased a 90% controlling interest in its subsidiary several

Question

A parent company purchased a 90% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $276,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $180,000 and to an unrecorded patent valued at $96,000. The building asset is being depreciated over a 12-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During a previous year, the subsidiary sold to the parent company a piece of depreciable property. The unconfirmed upstream gain on this intercompany transaction was $120,000 at the beginning of the current year. The upstream gain confirmed each year is $24,000. During the current year, the subsidiary declared and paid $90,000 of dividends. The parent company uses the cost method of pre-consolidation investment bookkeeping. Each company reports the following income statement for the current year:

a. Starting with the parent’s current-year pre-consolidation net income of $441,000, compute the amount of current-year net income attributable to the parent that will be reported in the consolidated financial statements.

Parent Subsidiary Income statement: Sales $4,600,000 $1,500,000 Cost of goods sold (3,280,000) (924,000) Gross profit 1,320,000 576,000 Income (loss) from subsidiary 81,000 0 Operating expenses (960,000) (384,000) Net income $441,000 $192,000

Explanation / Answer

Calculation of Profit from Subsidiary            $

Net Income                                            1,92,000

Less building asset depreciated                 15,000       (1,80,000/12yrs)

Less Patent amortized                              12,000       (96,000/8yrs)

Less Upstream Gain                                 24,000

Less Dividend Paid                                   90,000

                                                            1,05,000

Parent share in Profit -90%(1,05,000)           94,500

Amount of current-year net income attributable to the parent that will be reported in the consolidated financial statements.

Particulars                                                 $        

Profit of Parent Company                          4,41,000

Add-Profit Share in Subsidiary                     94,500

Net Profit As per Consolidation                   5,35,500

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