Assume that a wholly owned subsidiary sells inventory to the parent company. The parent company, ultimately, sells the inventory to customers outside of the consolidated group. The parent company compiled the following data for the years ending 2018 and 2019: Subsidiary Net Income Intercompany Inventory Sales Gross Profit % % Inventory Remaining at End of Year Receivable (Payable)
2019 $600,000 $80,000 35% 15% $30,000
2018 $500,000 $60,000 30% 12% $25,000
Assume that inventory not remaining at the end of the year was sold outside of the consolidated group during the year.
Assume the parent company uses the equity method to account for its subsidiary. The subsidiary paid $450,000 in dividends during 2019.
Required:
a. How much Equity Income should the parent report in its pre-consolidation income statement for the year ending 2019, assuming that it uses the equity method of accounting for its Equity Investment?
b. Prepare the required consolidation journal entries for 2019.