Question

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Yosef Corporation acquired 90% of the outstanding voting stock of Randeep Inc. on January 1, Year 6. During Year 6, intercompany sales of inventory of $45,000 (original cost of $27,000) were made. Only 20% of this inventory was still held within the consolidated entity at the end of Year 6 and was sold in Year 7. Intercompany sales of inventory of $60,000 (original cost of $33,000) occurred in Year 7. Of this merchandise, 30% had not been resold to outside parties by the end of the year.

At the end of Year 7, selected figures from the two companies’ financial statements were as follows:

	Yosef	Randeep
Inventory	$70,000	$45,000
Retained Earnings, Beginning of year	500,000	300,000
Net Income	150,000	55,000
Dividends	50,000	20,000
Retained earnings, end of year	600,000	335,000

Yosef uses the cost method to account for its investment in Randeep. Both companies pay income tax at the rate of 40%.

Requirement:

Assume Randeep's retained earnings at acquisition date January 1, Year 6 was $140,000. Calculate the Parent's (Yosef's) consolidated retained earnings balance at January 1, year 7 AND December 31, year 7

Answer 1

Calculation of Consolidated Retained Earnings:

Calculation of unearned profit :

Particulars. YEAR 6. YEAR 7

Intercompany Sales (A) $45000. $60000

Cost of sales. (B) $27000. $33000

Profit earned in intercom sale. $18000. $27000

{(A) - (B) = (C)}

Unearned profit $3600. $8100

{(C) * % of inventory held } $18000*20%. $27000*30%

Retained earnings at the end of Year 6

Unadjusted retained earnings : 800,000 (500,000+300,000)

Less : Unearned profit : 3,600

Adjusted retained earnings at the end of year 6

: 796,400

Add : Profit earned during the year : 208,600

( 150,000 + 55,000 + 3600 ).   

Less : Unearned profit for year 7 : 8,100

Less : Divedends paid : 70,000

Adjusted retainedearnings at the end of year 7 : 926,900