Question

On January 1, 2017, Doone Corporation acquired 70 percent of the outstanding voting stock of Rockne Company for $588,000 consideration. At the acquisition date, the fair value of the 30 percent noncontrolling interest was $252,000 and Rockne's assets and liabilities had a collective net fair value of $840,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $310,000 in 2018. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $370,000 in 2017 and $470,000 in 2018. Approximately 40 percent of the inventory purchased during any one year is not used until the following year.

1. What is the noncontrolling interest's share of Rockne's 2018 income?
2. Prepare Doone's 2018 consolidation entries required by the intra-entity inventory transfers.

Answer 1

Part 1

Noncontrolling interest's share of consolidated net income

$90600

Markup (given as a percentage of cost)	25%
Convert to gross profit rate [0.25 ÷ (1.00 + 0.25)]	20%

Noncontrolling interest's share of consolidated net income
Reported net income of subsidiary—2018	310000
2017 intra-entity gross profit recognized in 2018 ($370,000 × 40% × 20%)	29600
2018 intra-entity gross profit deferred ($470,000 × 40% × 20%)	(37600)
Adjusted net income of subsidiary—2018	$302000
Outside ownership	30%
Noncontrolling interest's share of consolidated net income	$90600

Part 2

No.	Accounts titles and explanation	Debit	Credit
1	Sales	470000
	Cost of goods sold		470000
	(to eliminate intra-company transfer of inventory)
2	Cost of goods sold	37600
	inventory		37600
	(to remove unrealized gross profit)
3	Retained Earnings	29600
	Cost of goods sold		29600
	(to remove unrealized gross profit from beginning Balances