Question & Answer

To prepare the consolidated income statement for ABC Corporation and its subsidiary XYZ Company for the year ended December 31, 2023, we need to follow these steps:

1. Eliminate Intercompany Transactions and Profits:

   • Intercompany sales: $300,000.
   • Markup on cost: 25%.
   • Ending inventory held by ABC: 40% of $300,000 = $120,000.
   • Unrealized profit: 25% of $120,000 = $30,000.

2. Calculate Unrealized Profit on Ending Inventory:

   • Ending inventory held by ABC: $120,000.
   • Unrealized profit: $30,000.

3. Non-controlling Interest's Share of XYZ's Net Income:

   • XYZ’s Net Income: 
     $\text{Sales}-\text{COGS}-\text{Operating Expenses}$$$= 2,000,000 - 1,200,000 - 400,000 = 400,000$$
   • Non-controlling interest (20% ownership):
     $$20\% \times 400,000 = 80,000$$

4. Consolidated Income Statement:

   • ABC's Sales: $5,000,000.

   • XYZ's Sales: $2,000,000.

   • Eliminate intercompany sales: $300,000.

   • Consolidated Sales: 
     $5,000,000+2,000,000−300,000=6,700,000.$

   • ABC's COGS: $3,000,000.

   • XYZ's COGS: $1,200,000.

   • Adjust for unrealized profit: $30,000.

   • Consolidated COGS: 
     $3,000,000+1,200,000−30,000=4,170,000.$

   • ABC's Operating Expenses: $1,200,000.

   • XYZ's Operating Expenses: $400,000.

   • Consolidated Operating Expenses: 
     $1,200,000 + 400,000 = 1,600,000$
   • $$\text{Sales} - \text{COGS} - \text{Operating Expenses}$$$$6,700,000 - 4,170,000 - 1,600,000 = 930,000$$

   • Add: Dividends received from XYZ by ABC: $60,000 (already included in consolidated statements).

   • Non-controlling interest share of net income: $80,000.

   • Consolidated Net Income attributable to ABC:

     $$930,000 - 80,000 = 850,000$$

Consolidated Income Statement for the year ended December 31, 2023:

5. Calculate Consolidated Retained Earnings:

   • ABC's beginning retained earnings: Assume $X (not provided).
   • Add: Consolidated Net Income attributable to ABC: $850,000.
   • Less: Dividends declared by XYZ: $100,000.
   • ABC's share of dividends from XYZ (80%): $80,000.
   • Intercompany dividends received: $(60,000) (already eliminated).
   • Consolidated retained earnings:
     $$\text{Beginning Retained Earnings (ABC)} + 850,000 - (100,000 - 80,000)$$$$X + 850,000 - 20,000 = X + 830,000$$

6. Intercompany Sale Impact on Goodwill:

   • Intercompany sales do not affect the calculation of goodwill.
   • Goodwill calculation is based on the excess purchase price over the fair value of the net identifiable assets of XYZ.
   • Unrealized profits from intercompany transactions should be eliminated in consolidation, but they do not affect the goodwill calculation directly.

In summary, the intercompany sale affects the consolidated income statement by requiring adjustments to eliminate intercompany transactions and unrealized profits. However, it does not impact the calculation of goodwill on ABC Corporation’s balance sheet.