Chapter 5 Assignment 1
Pexo Industries purchases the majority of their raw materials from an 80% owned subsidiary, Springmade Chemicals. Pexo purchased Springmade to assure supply availability at a time when the materials were being rationed in the industry due to supply issues overseas. Pexo was able to purchase Springmade at the book value of Springmade’s net assets. At the time of purchase, the book value and fair value of Springmade’s net assets were equal. Pexo purchased $2,890,000 of materials from Springmade in 2014 alone. All intercompany sales are made at 120% of cost, although Springmade is able to mark up their products 80% to other outside buyers. Pexo carried inventory on their books at the beginning and end of the year in the amount of $450,000 and $480,000, respectively, all of which had been purchased from Springmade. Income statement information for both companies for 2014 is as follows:
Sales Revenue $3,793,000 $4,441,000
Investment income from Springmade 245,000
Cost of Goods Sold (3,139,000) (3,270,000)
Expenses (257,000) (921,000)
Net Income $642,000 $250,000
Prepare a consolidated income statement for Pexo Corporation and Subsidiary for 2014.