Question

On January 1, 2020, Doone Corporation acquired 80 percent of the outstanding voting stock of Rockne Company for $448,000 consideration. At the acquisition date, the fair value of the 20 percent noncontrolling interest was $112,000, and Rockne's assets and liabilities had a collective net fair value of $560,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $170,000 in 2021. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $230,000 in 2020 and $330,000 in 2021. Approximately 30 percent of the inventory purchased during any one year is not used until the following year.


Requied:
a. What is the noncontrolling interest's share of Rockne's 2021 income?
b. Prepare Doone's 2021 consolidation entries required by the intra-entity inventory transfers

Answer 1

Answer:

(A). $32,800

(B). Entries are shown below.

Explanation:

(A) According to the scenario, computation of the given data are as follows,

Net income of Rockne Company in 2021 = $170,000

Unrealized profit 2020 = $230,000 × 30% × 20%  = $13,800

Unrealized profit 2021 = $330,000 × 30% × 20%  = $19,800

So, Total income = $170,000 + $13,800 - $19,800 = $164,000

Now, noncontrolling interest's share of Rockne's 2021 income can be calculated as follows,

NCI share of Rockne's 2021 income = Total income × 20%

= $164,000 × 20%

= $32,800

(B). Journal entries for the given data are as follows,

1.     Retained Earnings A/c  Dr.   $13,800

 To, COG sold A/c.                              $13,800

( Being event *G entry is recorded)

2.     Sales A/c  Dr.   $330,000

 To, COG sold A/c.         $330,000

( Being event TI entry is recorded)

3.     COG sold  A/c  Dr.   $19,800

 To, Inventory  A/c.                $19,800

( Being event G entry is recorded)