Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.
-Based on the preceding information,what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach?
A) $220,000
B) $202,000
C) $160,000
D) $200,000

Question

Quizplus · Accepted Answer

Under the parent company theory approach, the net income reported in the consolidated income statement includes the net income of the parent company and its subsidiaries. Small-Town Retail's share of Supplier Corporation's net income is 70%.
Small-Town Retail's net income = Sales - Expenses
= $450,000 - $290,000
= $160,000
Supplier Corporation's net income = Sales - Expenses
= $300,000 - $240,000
= $60,000
Therefore, the consolidated net income is:
Parent company's net income + Subsidiary's net income x Share of parent company
= $160,000 + $60,000 x 70%
= $202,000.

Small-Town Retail Owns 70 Percent of Supplier Corporation's Common Stock