Standard Company has a relatively high profit margin on its sales and Jewel Company has a substantially lower profit margin

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Standard Company has a relatively high profit margin on its sales and Jewel Company has a substantially lower profit margin. Standard holds 55% of Jewel’s common stock and includes Jewel Company in its consolidated financial statements. Standard and Jewel reported sales of $100,000 and $60,000 respectively, in 2018. Sales increased in 2019 to $120,000 and $280,000. The average profit margin of the two companies remained constant over the two years at 60% and 10% respectively.

Sarah, a Standard executive, was aware that the subsidiary was awarded a major new contract in 2019 and anticipated a substantial increase in net income for the year. She was disappointed to learn that the consolidated net income allocated to the non-controlling interest had increased to 38% even though sales were 2.5 times higher than in in 2018. She is not trained in accounting and does not understand the fundamental processes for preparing consolidated income statements.

Based on this weeks reading and weekly lecture:

• Prepare a memo to Sarah explaining how consolidated net income is computed and the procedures used to allocate income to the parent company and the non-controlling interest. The memo should contain quotes from authoritative literature.
• Prepare an analysis showing the income statement amounts actually reported for 2018 and 2019.