Question

The following information is available concerning transactions between a parent and its wholly-owned subsidiary for the current year.

• The subsidiary purchased land from its parent in a prior year, at a cost of $400,000. The parent had reported the land on its books at $300,000.
• The parent sells merchandise to the subsidiary. The subsidiary’s beginning inventory includes intercompany profit of $50,000, and its ending inventory includes intercompany profit of $65,000. Total sales from the parent to the subsidiary were $600,000.
• The parent sold equipment to the subsidiary at the beginning of the current year for $300,000 and reported a gain of $45,000. The equipment has a 5-year life, straight-line.

Required

Compute equity in net income of the subsidiary, reported on the parent’s books, for the current year. The parent uses the complete equity method, the subsidiary reports net income of $100,000 on its own books, and there are no revaluation write-offs for the year.

Answer 1

Computation of equity in net income of the subsidiary to be reported on the parent's books in current year :

Net income of subsidiary $100000

Elimination of Inter company transfer profit

1. Stock Inter company transfer Profit decrease   ($10000)

2. Equipment Sold Inter company transfer Profit decrease ($45000)

Equity Net Income to be Reported is equal to $45000

Notes:

Companies use the fully adjusted equity method for internal purposes. It does not meet generally accepted accounting principles, as does the complete equity method. When preparing the investor’s financial statements at the end of an accounting period, the investor must eliminate from its income statement any income it receives through inter company transfers. In addition, the investor must eliminate any associated increases in the investee’s equity shown on the balance sheet. After these eliminations and removals, the investor’s financial statements will reflect only the complete equity method.