Question

Angela, Inc. purchased 80% interest of Corby Company two years ago in an acquisition that resulted in excess amortization of $10,000. During 2018 Corby sold inventory costing $75,000 to Angela for $100,000. Of this inventory, $20,000 was not sold to outsiders until 2019. During 2019, Corby sold inventory costing $84,000 to Angela for $120,000. A total of $25,000 of this inventory was not sold to outsiders until 2020. In 2019, Angela reported separate net income of $150,000 while Corby's net income was $50,000. What is the NCI share in the 2019 net income of the subsidiary? a. $7,000 b. $7,200 c. $7,500 d. $7,800

Answer 1

Answer :-

The Correct Answer is Option C - $ 7,500

Explanation :-

First we calculate the unrealized intra entity gross profit of 2018 and 2019

Unrealized intra entity gross profit of 2018 :-

Unrealized intra entity gross profit of 2018 = Ending Inventory of 2018 × Gross profit rate

Ending Inventory = $20,000 ( not sold until 2019)

Gross profit rate = (Inventory sell price - Inventory cost price) /Inventory sell price

During 2018, Inventory sell price = $100,000

Inventory cost price = $ 75,000

Gross profit rate = ($100,000 - $75,000) / $100,000

Gross profit rate = 0.25 or 25%

Unrealized intra entity gross profit of 2018 = $20,000 × 25% = $5,000

Unrealized intra entity gross profit of 2019 :-

Unrealized intra entity gross profit of 2019 = Ending Inventory of 2019 × Gross profit rate

Ending Inventory = $25,000 ( not sold until 2020)

Gross profit rate = (Inventory sell price - Inventory cost price) /Inventory sell price

During 2019, Inventory sell price = $120,000

Inventory cost price = $ 84,000

Gross profit rate = ($120,000 - $84,000) / $120,000

Gross profit rate = 0.3 or 30%

Unrealized intra entity gross profit of 2019= $25,000 × 25%

Unrealized intra entity gross profit of 2019 = $7,500

Now we find Non Controling Interest(NCI) shares in the 2019 net income of the subsidiary :-

Particular	Amount
Net income of Corby's in 2019	$50,000
Less :- Excess Amortization (given)	$10,000
Net income after amortization	$40,000
Unrealized intra entity gross profit of 2018 realized in 2019	$5,000
Unrealized intra entity gross profit of 2019	($7,500)
Realized Net income of subsidiary	$37,500
Subsidiary Ownership % ( 100% - Angela ownership %)	20%
NCI share in 2019 ( Realized Net Income of Subsidiary × Subsidiary ownership %)	$7,500