Petrel Corporation acquired a 60% interest in Salt Corporation on January 1, 200

Question

Petrel Corporation acquired a 60% interest in Salt Corporation on January 1, 2005, at a cost equal to book value and fair value. Salt reports net income of $880,000 for 2005. Petrel regularly sells merchandise to Salt at 120% of Petrel’s cost. The intercompany sales information for 2004 is as follows:      Intercompany sales at selling price      $ 672,000      Value of merchandise remaining       unsold by Salt                            132,000 Required: 1 Determine the unrealized profit in Salt’s inventory at December 31, 2004. 2 Compute Petrel’s income from Salt for 2005. Petrel Corporation acquired a 60% interest in Salt Corporation on January 1, 2005, at a cost equal to book value and fair value. Salt reports net income of $880,000 for 2005. Petrel regularly sells merchandise to Salt at 120% of Petrel’s cost. The intercompany sales information for 2004 is as follows:      Intercompany sales at selling price      $ 672,000      Value of merchandise remaining       unsold by Salt                            132,000 Required: 1 Determine the unrealized profit in Salt’s inventory at December 31, 2004. 2 Compute Petrel’s income from Salt for 2005.

Explanation / Answer

Note: we have to determine unrealized profit only from unsold stock

Unsold stock = $132000

Profit markup = (132000/120)*20= 22000

Profit included in december31,2004 inventory = $22000

Petrels income @60%= 880000*60%

$528000

Note: for 2005 there is no information available so it is assumed that net income of 880000 is afte all adjustments.

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