Homework SourseExercise 1 LO 1 2 Gross profit separate firms versus consoli
Exercise 1 (LO 1, 2) Gross profit: separate firms versus consolidated. Sorel is an 80%-owned subsidiary of Pattern Company. The two affiliates had the following separate income statements for 2015 and 2016.
Sorel sells at the same gross profit percentage to all customers. During 2015, Sorel sold goods Pattern for the first time in the amount of $120,000. $30,000 of these sales remained in Pattern\'s ending inventory. During 2016, sales to Pattern by Sorel were $150,000, of which $25,000 sales were still in Pattern\'s December 31, 2016, inventory.
Prepare consolidated income statements including the distribution of income to the controlling and noncontrolling interest for 2015 and 2016.
| Sorel Company | Pattern Company | |||
| 2015 | 2016 | 2015 | 2016 | |
| Sales Revenue | 250,000 | 350,000 | 500,000 | 540,000 |
| Cost of Good Sold | 150,000 | 210,000 | 310,000 | 360,000 |
| Gross Profit | 100,000 | 140,000 | 190,000 | 180,000 |
| Expenses | 45,000 | 66,000 | 120,000 | 125,000 |
| Net Income | 55,000 | 74,000 | 70,000 | 55,000 |
Solution
Gross profit % of Sorel in 2015= GP/revenue*100
= 100000/250000*100
=40%on sales price
Gross profit % in 2016= 140000/350000*100
= 40% on sales
Unrealised profit on unsold stock 2015=30000*40/100
=12000
Unrealised profit for 2016=25000*40/100
=10000
Consolidated income statement:
Note: in consolidated FS intercompany sale and COGS are excluded.
Sales=250000+500000-120000 = 630000
COGS=150000+310000-60%of120000=388000
(same for 2016)
#individual income of Sorel:(2015)
Net income=55000- share of minority in unrealised profit(12000*20/100)
=55000-2400
=52600
#52600 will be distributed in 80% to controllig and 20% to minority
individual income of Sorel:(2016)
Net income=74000-minority share in unrealised profit(10000*20/100)
=74000-2000 = 72000
72000$distributed in80:20ratio
| 2,015 | 2,016 | |
| Sales | 750,000 | 890,000 |
| less: intercompany sale | (120,000) | (150,000) |
| net sales | 630,000 | 740,000 |
| COGS(exclude cost of intercompany sale) | 388,000 | 480,000 |
| Unrealised profit | 12,000 | 10,000 |
| Gross profit | 230,000 | 250,000 |
| Expenses | 165,000 | 191,000 |
| Net income | 65,000 | 59,000 |
