The file has one tab, labeled with a letter or two (“A” or “AD” for example). Do not alter that worksheet, keep it exactly as you received it. It should be either the first or the last tab in your workbook, but it must be there and intact.
Note that I use the convention positive numbers are debits and negative numbers, shown in parentheses, are credits. You should use that same convention in making adjustments.
On a new worksheet, you will consolidate Parent and Subsidiary. • Set up a consolidation worksheet with parent, subsidiary and columns for adjustments, and consolidated amounts. • At the bottom of your worksheet is an amount of Intercompany Sales, from Subsidiary to Parent. Those sales were made to generate a gross profit at the percentage indicated with the intercompany sales amount. Just to be clear, the Intercompany Sales amount is at the selling price from Subsidiary to Parent. • Of the intercompany sales, one-half of the sales remain in Parent Company’s inventory (part of Current Assets). Round if you must, do everything in whole dollars. Make appropriate adjustments for the inventory. • Parent Company charges a “management fee” to Subsidiary Company (related to services that Parent Company performs for Subsidiary). The fee is 1.5% of Subsidiary’s sales. Subsidiary records the expense in “Administrative expense.” Parent Company records the income in “Other Expense” (since it’s income, it reduces the “Other expense” amount).
| SUBSIDIARY COMPANY | |
| Statement of Financial Position | |
| Current assets | 998,000 |
| PP&E | 5,800,000 |
| Accumulated depreciation | (100,000) |
| Goodwill | 3,685,000 |
| Patents and other noncur. | 1,047,000 |
| Investment in SubCo | |
| Total assets | 11,430,000 |
| Current liabilities | (250,000) |
| Noncurrent liabilities | (2,500,000) |
| Common stock | (8,400,000) |
| Retained earnings | (280,000) |
| Total liabilities and equity | (11,430,000) |
| – | |
| Statement of Income | |
| Sales | (10,000,000) |
| Cost of goods sold | 4,950,000 |
| Administrative expense | 600,000 |
| Technology expense | 2,400,000 |
| Marketing expense | 950,000 |
| Equity income SubCo | – |
| Other expense | 800,000 |
| Income tax expense | 80,000 |
| Net Income | (220,000) |
| PARENT COMPANY | |
| Statement of Financial Position | |
| Current assets | 250,000 |
| PP&E | 18,750,000 |
| Accumulated depreciation | (7,553,750) |
| Goodwill | 10,830,013 |
| Patents and other noncur. | 8,915,250 |
| Investment in SubCo | 8,680,000 |
| Total assets | 39,871,513 |
| Current liabilities | (535,000) |
| Noncurrent liabilities | (5,159,013) |
| Common stock | (24,675,000) |
| Retained earnings | (9,502,500) |
| Total liabilities and equity | (39,871,513) |
| Statement of Income | |
| Sales | (29,095,000) |
| Cost of goods sold | 14,570,000 |
| Administrative expense | 1,762,500 |
| Technology expense | 7,050,000 |
| Marketing expense | 2,585,000 |
| Equity income SubCo | (220,000) |
| Other expense | 2,350,000 |
| Income tax expense | 235,000 |
| Net Income | (762,500) |
| Sub gross profit (interco sales) | 51% |
| Intercompany Sales | 500,000 |
