Computing the amount of equity income and preparing [I] consolidation journal entries-Equity method

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 2015 and 2016:

	Subsidiary Net Income	Inventory Sales	Gross Profit %	% Inventory Remaining at End of Year	Receivable (Payable)
2016	$1,800,000	$270,500	34%	15%	$90,000
2015	$1,440,000	$180,000	30%	18%	$72,000

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 $1,350,000 in dividends during 2016.

a. How much Income (loss) from subsidiary should the parent report in its pre-consolidation income statement the year ending 2016 assuming that it uses the equity method of accounting for its Equity Investment?

b. Prepare the required [I] consolidation journal entries for 2013.

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