Question

On January 1, 2017, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne...

On January 1, 2017, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne Company for $784,000 consideration. At the acquisition date, the fair value of the 20 percent noncontrolling interest was $196,000 and Rockne's assets and liabilities had a collective net fair value of $980,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $380,000 in 2018. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $440,000 in 2017 and $540,000 in 2018. Approximately 30 percent of the inventory purchased during any one year is not used until the following year.

What is the noncontrolling interest's share of Rockne's 2018 income?

Prepare Doone's 2018 consolidation entries required by the intra-entity inventory transfers.

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Answer #1

1)

The value of noncontrolling interest's share of Rockne's 2018 income is determined as below:

Net Income of Subsidiary 380000
Add 2017 Intra Entity Gross Profit Realized in 2018 (440000*30%*20%) 26400
Less 2018 Intra Entity Gross Profit Deferred (540000*30%*20%) -32400
Realized Income of Subsidiary 374000
Non Controlling Interests Share of Net Income (374000*20%) 74800

2 )

The journal entries are prepared as below:

Event General Journal Debit Credit
Entry *G Retained Earnings 26400
Cost of Goods Sold 26400
Entry TI Sales 540000
Cost of Goods Sold 540000
Entry G Cost of Goods Sold 32400
Inventory 32400

The gross profit percentage is calculated as below:

Gross Profit Percentage = Markup Percentage/(1+Markup Percentage) = 25%/(1+25%) = 20%

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