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Item 1

Item 1 10 points

On January 1, Year 2, PAT Ltd. acquired 90% of SAT Inc. when SAT’s retained earnings were $1,300,000. There was no acquisition differential. PAT accounts for its investment under the cost method. SAT sells inventory to PAT on a regular basis at a markup of 30% of selling price. The intercompany sales were $190,000 in Year 2 and $220,000 in Year 3. The total amount owing by PAT related to these intercompany sales was $90,000 at the end of Year 2 and $80,000 at the end of Year 3. On January 1, Year 3, the inventory of PAT contained goods purchased from SAT amounting to $100,000, while the December 31, Year 3, inventory contained goods purchased from SAT amounting to $110,000. Both companies pay income tax at the rate of 40%.

Selected account balances from the records of PAT and SAT for the year ended December 31, Year 3, were as follows:

	PAT			SAT
Inventory	$	540,000		$	700,000
Accounts payable		1,000,000			720,000
Retained earnings, beginning of year		2,800,000			1,500,000
Sales		4,400,000			2,900,000
Cost of sales		3,500,000			2,100,000
Income tax expense		180,000			50,000

Required:

(a) Determine the amount to report on the Year 3 consolidated financial statements for the selected accounts noted above. (Omit $ sign in your response.)

Inventory		$
Accounts payable
Retained earnings, beginning of year
Sales
Cost of sales
Income tax expense

Answer 1

Answer- The amount to report on the Year 3 consolidated financial statements for the selected accounts :-

Inventory ($540,000+$700,000-(d) $33,000)			$1,207,000
Accounts payable ($1,000,000+$720,000-(b)$80,000 )			$1,640,000
Retained earnings, beginning of year
PAT		$2,800,000
SAT,RE	$1,500,000
beginning of the year SAT R/E date of acquisition	$1,300,000
Change since acquisition	$200,000
Less: Unrealized profit in beginning inventory (c)	-$18,000
PAT's share	$182,000 *90%	$163,800
Consolidated Retained Earnings			$2,963,800
Sales ($4,400,000 + $2,900,000 – (a) $220,000)			$7,080,000
Cost of sales ($3,500,000 + $2,100,000 – (a) $220,000 + (d) $33,000 – (c) $30,000)			$5,383,000
Income Tax Expenses ($180,000+$50,000-(d)$13,200+(c)$12,000)			$228,800

Working Note:-

Intercompany balances:-

Sales and purchase for year 3 (a)	$220,000
Accounts Receivable and Payable at the end of year 3 9 (b)	$80,000

Intercompany inventory profits:-

	Before Tax	40% Tax	After Tax
Opening Inventory-sub selling ($100,000*30%) (c)	$30,000	$12,000	$18,000
Closing Inventory-sub selling ($110,000*30%) (d)	$33,000	$13,200	$19,800