Question

On January 1, 2014, 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 2015. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $370,000 in 2014 and $470,000 in 2015. Approximately 40 percent of the inventory purchased during any one year is not used until the following year.

A. what is the NCI share of Rockne's 2015 income?

B. Prepare Doone's 2015 consolidation entried required by the intra-equity inventory transfers

Answer 1

Part A

Conversion from markup on cost to gross profit rate
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—2015	310000
2014 intra-entity gross profit recognized in 2015 ($370,000 × 40% × 20%)	29600
2015 intra-entity gross profit deferred ($470,000 × 40% × 20%)	(37600)
Adjusted net income of subsidiary—2015	$302000
Outside ownership	30%
Noncontrolling interest's share of consolidated net income	$90600

Part B

No.	Journal entries	Debit	Credit
Entry *G	Retained earnings Jan. 1 (subsidiary)	29600
	Cost of goods sold		29600
	To remove intra-entity gross profit from previous year so that it can be recognized in current year
Entry Tl	Sales	470000
	Cost of goods sold		470000
	To eliminate intra-entity inventory sale and purchase
Entry G	Cost of goods sold	37600
	Inventory		37600
	To remove effects of current year unrealized gross profit