Question

Consolidated Income Statement When Parson Company acquired all of Soaper Company’s stock on July 1, 2019, Soaper’s inventory was undervalued by $160,000,000, plant assets with a 10‑year life were overvalued by $200,000,000, and long-term debt which matures in five years was overvalued by $100,000,000. No goodwill arose in the combination. All of Soaper’s depreciation and amortization charges are based on the straight‑line method. The undervalued inventory was sold during the year ended June 30, 2020. The separate income statements of Parson and Soaper for the year ended June 30, 2020, follow (amounts in millions).

Parson Soaper

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,000 $2,000

Equity in net income of Soaper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 —

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,140 2,000

Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 800

Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 140

Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 60

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 700

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 1,700

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 940 $ 300

Required

a. Prepare a consolidated income statement for Parson and Soaper for the year ended June 30, 2020.

b. Why is consolidated income the same as Parson’s separately reported net income?

Answer 1

Part-a:

Consolidated income statement:

	Amount (in millions)	calculation
Sales	$7,000	$5,000+$2,000
Cost of goods sold	3,960	$3,000+$800+$160
Gross margin	3,040
Depreciation expense	620	$500+140-(200/10)
Interest expense	180	$100+60+(100/5)
Other expenses	1,300	$600+700
Total operating expenses	2,100
Net income	$940

Part-b:

Combined income for Parson is his individual income plus reported revenues & expenses plus Soaper’s expenses which were adjusted for revaluation write-offs. Here, when Soaper’s reported income is adjusted for the same write-offs of net asset revaluations, it is called as Equity in the income of Soaper. Now, Parson reports the income = $800 million + $140 million (equity in the income of Soaper). Thus, his consolidated income and reported income are same but with different representation.