Question

Purkle Corporation purchases merchandise from its 94%-owned subsidiary, Sterkel Company, at the subsidiary’s normal gross profit...

Purkle Corporation purchases merchandise from its 94%-owned subsidiary, Sterkel Company, at the subsidiary’s normal gross profit rate of 25%. Purkle’s accounting records for Year 2 show the following with respect to purchases from Sterkel (note that Purkle purchases from Sterkel so the amounts shown below are at the markup up price that Purkle paid – the markup was 25% of those markup prices):

            Inventories, Jan. 1, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     0

            Year 1 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    400,000

            Inventories, Dec. 31, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     40,000

            Year 2 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     600,000

            Inventories, Dec. 31, Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       80,000         


1. Prepare a working paper elimination for Purkle Corporation and subsidiary on December 31, Year 1 for the intercompany sale of inventory.

2. Prepare a working paper elimination for Purkle Corporation and subsidiary on December 31, Year 2 for the intercompany sale of inventory.

3. If Sterkel reports on its trial balance $130,000 of net income for Year 2, assuming no other adjustments other than for the intercompany sale of inventory, what would be the Non-Controlling Interest Share of Consolidated Net Income for Year 2?

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Answer #1

When Holding company purchase goods from its subsidiary company then unrealised profit on unsold stock should be eliminated since this is ultimately shared by holding and minority shareholders.

1) Year 1 elimination of unrealised profit from consolidated profit and minority will be as follows:

40000/125*25=8000 is the total unrealised profit

8000*94/100=7520will be eliminated from consolidated profit and loss

8000-7520=480 from minority

2) Year 2 80000/125*25=16000 unrealised profit

16000*94/100=15040  eliminated from consolidated profit and loss

16000-15040=960 from minority

3) profit share of noncontrolling (minority shareholder)=130000*6/100=7800

Less: Unrealised profit of Year2 = (960)

Actual profit of minority= 7800-960=6840$

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