Reference no: EM132970488

On January 1, Year 8, Fazli Co. acquired all of the common shares of Gervais. The following transactions occurred in January and February, Year 8:

• On January 10, Gervais purchased $14,000 of inventory from outsiders.
• On January 20, Gervais sold $8,000 of this inventory to Fazli for $9,650, which represents a markup of 20% over cost.
• On January 30, Fazli sold $8,000 of the inventory purchased from Gervais to outsiders for $10,400, which represents a markup of 30% over cost.
• On February 10, Gervais purchased 14,000 of inventory from outsiders.
• On February 20, Gervais sold $11,000 of inventory to Fazli for $13,200, which represents a markup of 20% over cost.
• On February 30, Fazli sold $9,840 of inventory purchased from Gervais to outsiders for $12,300, which represents a markup of 25% over cost.

Fazli uses the cost method to account for its investment in Gervais. Both companies pay income tax at the rate of 40%. Gervais did not pay any dividends in Year 8.

Required:

Problem (a) Prepare income statements for January and February for Fazli, Gervais, and Consolidation. Break down cost of sales into its three components. (Leave no cells blank - be certain to enter "0" wherever required. Values in the fourth column (Adjust column) that