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.
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|
The journal entries are prepared as below:
|Entry *G||Retained Earnings||26400|
|Cost of Goods Sold||26400|
|Cost of Goods Sold||540000|
|Entry G||Cost of Goods Sold||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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