[nalratoss]

Fact Pattern: The separate condensed balance sheets and income statements of Pater Corp. and its wholly owned subsidiary, Subito Corp., are as follows:
BALANCE SHEETS
As of December 31
Pater
Subito
Assets
Current assets
Cash
$ 80,000
$ 60,000
Accounts receivable (net)
140,000
25,000
Inventories
90,000
50,000
Total current assets
$ 310,000
$135,000
Property, plant, and
equipment (net)
515,000
280,000
Intangible assets
100,000
—
Investment in Subito
(equity method)
400,000
—
Total assets
$1,325,000
$415,000
Liabilities and Equity
Current liabilities
Accounts payable
$ 160,000
$ 95,000
Accrued liabilities
110,000
30,000
Total current liabilities
$ 270,000
$125,000
Equity
Common stock ($10 par)
$ 300,000
$ 50,000
Additional paid-in capital
10,000
Retained earnings
755,000
230,000
Total equity
$1,055,000
$290,000
Total liabilities and equity
$1,325,000
$415,000

INCOME STATEMENTS
For the Year Ended December 31
Pater
Subito
Sales
$2,000,000
$750,000
Cost of goods sold
1,540,000
500,000
Gross margin
$ 460,000
$250,000
Operating expenses
260,000
150,000
Operating income
$ 200,000
$100,000
Equity in earnings of Subito
70,000
—
Income before income taxes
$ 270,000
$100,000
Provision for income taxes
70,000
30,000
Net income
$ 200,000
$ 70,000
Additional Information:
On January 1, Pater purchased for $360,000 all of Subito’s $10 par, voting common stock. On January 1, the fair value of Subito’s assets and liabilities equaled their carrying amounts of $410,000 and $160,000, respectively. Pater amortizes intangible assets over a 10-year period.
During the year, Pater and Subito paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Pater receives the 100% exclusion for dividends received from Subito.
There were no intraentity transactions, except for Pater’s receipt of dividends from Subito and Pater’s recording of its share of Subito’s earnings.
No transactions affected other comprehensive income.
Both Pater and Subito paid income taxes at the rate of 30%.
Pater treats Subito as a reporting unit, and all goodwill acquired in the business combination is assigned to Subito for the purpose of testing impairment. However, goodwill was not impaired on December 31.
Assume that no eliminations or adjustments in the consolidation procedure affect the amount of Pater’s or Subito’s net income included in consolidated net income.

In the December 31 consolidated financial statements of Pater and its subsidiary, net income should be
Correct Submit $200,000
This answer is correct.
Because Pater owns 100% of Subito, all of Subito’s net income for the period since acquisition is included in Pater’s separate net income. Also, given that no eliminations or adjustments affect the separate net income of Pater and Subito, consolidated net income for the year is $200,000.
Graded Submit $270,000
Submit $170,000
Submit $190,000

I don’t understand, in the textbook, they added the NI of parent and sub together. Yet in here, when they asked about the net income in consolidated financial statements, the NI of sub is not added.

I hate it when they publish material that is confusing.

FAR-80

AUD-77

REG-75

BEC-82

 

I'm done done!

[Anonymous]

In the textbook example, how much of the sub was owned?

[nalratoss]

@Almond
In the book, the parent owns 80% of sub.

I guess the trick here is, in the book's example, before showing the income of Parent and Sub, it says “the following are the separate statements of income of the two companies, excluding P's share of income from S”

“excluding P's share of income from S”

Is that the trick here?

So basically, in the question shown above, all the income shown for the Sub are Parent's share?

FAR-80

AUD-77

REG-75

BEC-82

 

I'm done done!

[Author]

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