On January 1, 2014, Doone Corporation acquired 80 percent of the outstanding vot

Question

On January 1, 2014, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne Company for $496,000 consideration. At the acquisition date, the fair value of the 20 percent noncontrolling interest was $124,000 and Rockne’s assets and liabilities had a collective net fair value of $620,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $200,000 in 2015. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $260,000 in 2014 and $360,000 in 2015. Approximately 30 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.)

Explanation / Answer

a) Conversion from Markup on Cost to Gross Profit Rate Mark up cost (given) 25.00% Gross profit Rate = 25%/(1+25%) 20.00% Noncontrolling Interest's Share of Subsidiary’s Income Net Income 2015 $200,000 2014 intercompany gross profit realized in 2015 ;($260,000 x 30% x 20%) $15,600 Less: 2015 intercompany gross profit deferred ;($360,000 x 30% x 20%) -$21,600 Realized income of subsidiary—2015 $194,000 Noncontrolling Interest 20.00% Noncontrolling interest's share of subsidiary's income $38,800 b) Doone’s 2015 consolidation entries required by the intra-entity inventory transfers Gross profit Entry Retained Earnings, Jan. 1 (subsidiary) $15,600 Cost of Good Sold $15,600 (To record Gross profit realised) Sales $360,000 Cost of Good Sold (Purchases) $360,000 (To eliminate intercompany inventory sale and purchase) Cost of Good Sold $21,600 Inventory $21,600 (To record Gross profit deferred)

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