Question

4. Z Ltd owns 60 000 shares of E Ltd. E Ltd had a total of 100 000 shares. During the period, E Ltd (which is a subsidiary of Z Ltd) has sold goods to Z Ltd at a mark-up of 20% on its costing $1 000. On the reporting date, these goods remain unsold with Z Ltd. What is the effect related to adjusting non-controlling interest (NCI) at the time of consolidation? NCI to be:

   1. A) Reduced by $120

   2. B) Increased by $200

   3. C) Reduced by $80

   4. D) No effect or adjustment required

Answer 1

This is a case, where the subsidiary company has sold goods to holding company.

Cost of goods=$1000
Mark-up = 20% of cost
= 20% of $1000
= $200
Therefore, Goods sold for $1200 (i.e. $1000 + $200).
Since the goods are unsold with Z ltd. Therefore, Unrealized Profit is $200.
The holding company (i.e. Z ltd) must exclude 100% of the unrealized profit on consolidation. The goods will, therefore, be carried in the group's balance sheet at $1000. The corresponding income statement will show a corresponding reduction in profit of $200.
The reduction of group profit of $200 is allocated between the holding company and non-controlling interest in the ratio of their interests i.e. 60% and 40%.

Therefore, balance of NCI will get reduced by 40% of the unrealized profits i.e. $80 (40% of $200).

So,Option C(reduced by $80) is correct.