Question

On January 1, 2014, Doone Corporation acquired 60 percent of the outstanding voting stock of Rockne Company for $312,000 consideration. At the acquisition date, the fair value of the 40 percent noncontrolling interest was $208,000 and Rockne’s assets and liabilities had a collective net fair value of $520,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $150,000 in 2015. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $210,000 in 2014 and $310,000 in 2015. Approximately 35 percent of the inventory purchased during any one year is not used until the following year.

a. What is the noncontrolling interest’s share of Rockne’s 2015 income?
b. Prepare Doone’s 2015 consolidation entries required by the intra-entity inventory transfers. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

Explanation:

Markup is given at 25%

⇒Conversion to gross profit rate = 0.25/1.25 = 20%

Noncontrolling interest’s share

Reported income in 2015  150,000

Add: 2014 intra company gross profit realized in 2015  14,700

[210,000*0.35* 0.20]

Less: Deferred intra company gross profit for 2015       (21,700)

[310,000*0.35*0.20]

2015 realized income   143,000

Outside ownership percentage 40%

Noncontrolling interest’s share  57,200

Consolidation entries

Dr Retained earnings 14,700

    Cr Cost of Goods Sold 14,700

Dr Sales 310,000

   Cr Cost of Goods Sold 310,000

Dr Cost of Goods sold  21,700

    Cr Inventory 21,700