On 1/1/2016, Choco acquired 70% of Cake. Choco paid $700,000 and acquisition dat
ID: 2530410 • Letter: O
Question
On 1/1/2016, Choco acquired 70% of Cake. Choco paid $700,000 and acquisition date fair value of non-controlling interest (NCI) is $200,000. On 1/1/2016, Choco allocated the entire $80,000 excess fair value over book value to adjust “patented technology” account (estimated remaining life of 10 years). During 2016, Choco sold goods to Cake for $200,000 which cost Choco $170,000. Cake still owns 50% of the goods at the end of 2016. Sales revenue for Choco is $1,200,000, and for Cake is $800,000 in 2016. Cost of goods sold for Choco is $700,000 and for Cake is $500,000 in 2016. Net income for Choco is $120,000 and for Cake is $70,000 in 2016. Cake declared $10,000 of dividends in 2016. Choco uses equity method to account for this investment
Calculate 1) gross profit in percentage and 2) gross profit for remaining year-end inventory.
What is the “equity in earnings of Cake” and “investment in Cake” in 12/31/16?
Prepare consolidation Entry TI
Prepare consolidation Entry G:
What is the consolidated sales revenue for 2016?
What is the consolidated cost of goods sold for 2016?
What is the non-controlling interest’s (NCI’s) share of consolidated net income?
Explanation / Answer
Step 1:
Choco acquired Cake: Controlling share of acquisition of 70% stake in Cake for a consideration of $7 lac (an excess $80000 fair value over book value.
Step 2:
Remaining 30% stake are considered to be non-controlling interest stake, for which the fair value s $2,00,000.
Step 3:
During 2016, Choco sold good worth $2,00,000 ( COGS= $1,70,000) to cake. Out of which 1,00,000 are still with cake in its end inventory. So the internal sales amount to $ 2,00,000.
Step4:
Choco
Cake
Particulars
Amount
Amount
Sales
12,00,000
8,00,000
Cost of good sold
70,000
5,00,000
Net Income
1,20,000
70,000
Dividend
-
10,00
What is the consolidated sales revenue for 2016?
=Sales revenue of Choco-Internal sales to cake by Choco+ 70% of sales revenue of cake
=12,00,000-2,00,000+8,00,000*0.70
=15,60,000
What is the consolidated cost of good sold in 2016?
=COGS of Choco- internal COGS for the goods sold to Cake by Choco +70% of COGS of Cake.
=70,000-1,70,000+5,00,000*0.70
=2,50,000
Gross profit in %= Consolidated sales revenue- consolidated COGS= (15,60,000-2,50,000)/15,60,000= 83.9%=~84%
What is equity in earnings of Cake?
As Choco has 70%, stake in the Cake, hence Choco's share in Cake's earning =49000
What is the value of investment in Cake at the year end 31/12/2016?
As Choco uses equity method of acquisition consolidation, The aquisition consideration which was $ 7,00,000 is considered to be the initial investmnet made by Choco in Cake. Further, with the controlling investment holding in Cake of 70%, Choco will also record the share of Cake's earning as the revenue from investment which is expected to increase the carrying value of investment. Hence the Investment in Cake at the year end will also incude the 70% of the net income of Cake. Investment in Cake as on 31/12/2018=7,00,000+49,000= 7,49,000
What is the non-controlling interest's (NCI's) share of consolidated net income?
Consolidated Net Income = Net Income of Choco+ 70% of Net Income of Cake
Consolidated Net Income= 1,20,000+49,000 = 1,69,000
Non -controlling interest share of consolidated income = 30% of consolidated net income =50,700
Choco
Cake
Particulars
Amount
Amount
Sales
12,00,000
8,00,000
Cost of good sold
70,000
5,00,000
Net Income
1,20,000
70,000
Dividend
-
10,00
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