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

Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending $2012$ and $2013$:

Subsidiary

Net

Income Intercompany

Inventory

Sales Gross Profit

on Unsold

Inventories

Receivable

$($Payable$)2013$ $$300,000$ $$50,000$ $$18,000$ $$20,0002012$ $$200,000$ $$40,000$ $$13,500$ $$15,000$

Assume that inventory not remaining at the end of the year was sold outside of the consolidated group.

a$.$ How much Equity Income should the parent report in its pre$-$consolidation income statement the year ending $2013$ assuming that it uses the equity method of accounting for its EquityInvestment? Assume the parent company uses the full equity method to account for its subsidiary.

$Answer

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

Consolidation Journal Description Debit Credit $[$Icogs$]$ To recognize deferred profit on prior year's sale. $[$Isales$][$Icogs$]$ To defer gross profit the intercompany sale. $[$Ipay$]$