Question

Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1, 2014, when the book...

Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1, 2014, when the book values of Shenley's assets and liabilities were equal to their fair values. The cost of the 80% interest was equal to 80% of the book value of Shenley's net assets. During 2014, Pouch sold merchandise that cost $70,000 to Shenley for $86,000. On December 31, 2014, three-fourths of the merchandise acquired from Pouch remained in Shenley's inventory. Separate incomes (investment income not included) of the two companies are as follows:

                                                  Pouch           Shenley

Sales Revenue                     $180,000        $160,000

Cost of Goods Sold               120,000             90,000

Operating Expenses                 17,000             21,000

Separate incomes                  $ 43,000          $ 49,000

What is Pouch's income from Shenley for 2014?

A.

$39,200
B.

$27,200
C.

$49,000
D.

$29,600
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Answer #1

Pouch sold merchandise that cost $70,000 to Shenley for $86,000 and made a profit of of $16,000.

3/4th of the inventory was held as closing stock by Shenley at year end. This also includes the profit made by Pouch which needs to be adjusted.

Therefore, profit element in the closing stock = $86,000 X 3/4 X $16,000/ $86,000

= $12,000

Separate income of Shenley for the year 2014 = $49,000

This includes the profit that Pouch made by selling the merchandise to Shenley. So we will eliminate that profit from Shenley's separate income to arrive at Pouch's share.

Adjusted Separate Income of Shenley for the year 2014 = $49,000 - $12,000

= $37,000

Pouch corporation acquired 80% interest in Shenley corporation.

Pouch's income from Shenley = $37,000 X 80%

= $29,600

Hence the correct answer is D.

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