E 5-8 Consolidated income statement with downstream sales The separate incomes (which do not include investment income) of Pat Corporation and Sal Corporation, its 80 percent-owned subsidiary, for 2011 were determined as follows (in thousands): PatSal Sales$1,600$400 Less: Cost of sales800160 Gross profit800240 Other expenses400120 Separate incomes$ 400$120 During 2011, Pat sold merchandise that cost $80,000 to Sal for $160,000, and at December 31, 2011, half of these inventory items remained unsold by Sal. REQUIRED: Prepare a consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

Consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

                                                                 (in thousands)  

Sales $1,600+$400-$160                               $1,840

Less: Cost of sales $800+$160-$160+$40    ($840)

Gross profit                                                     $1,000

Other expenses $400 + $120                        ($520)

Incomes                                                             $480

Explanation:

The Consolidation Process is always 100% of Parent plus the 100% of the Subsidiary. Make sure to eliminate all intragroup transactions.

Thus, first eliminate intragroup transactions as follows

Eliminate Intragroup Sale :

Revenue $160,000 (debit)

Cost of Goods Sold $160,000 (credit)

Eliminate the unrealized profit in closing inventory :

Cost of Goods Sold $40,000 (debit)

Inventory $40,000 (credit)

Then prepare consolidated income statement as follows :

Consolidated income statement for Pat Corporation and Subsidiary for the year ended December 31, 2011.

                                                                 (in thousands)  

Sales $1,600+$400-$160                               $1,840

Less: Cost of sales $800+$160-$160+$40    ($840)

Gross profit                                                     $1,000

Other expenses $400 + $120                        ($520)

Incomes                                                             $480