Question

On January 1, 2017, Doone Corporation acquired 60 percent of the outstanding voting stock of Rockne Company for $528,000 consideration. At the acquisition date, the fair value of the 40 percent noncontrolling interest was $352,000 and Rockne's assets and liabilities had a collective net fair value of $880,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $330,000 in 2018. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $390,000 in 2017 and $490,000 in 2018. Approximately 35 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 A
	The Value of non controlling interest's share of Rockne's 2018 income determined as below:
	Net Income of Subsidiary in 2018	$ 330,000
	Add: 2017 Intra Equity Gross Profit Realized in 2018 (390000*35%*20%)	$       27,300
	Less: 2018 Intra Equity Gross Profit deferred (490000*35%*20%)	-$       34,300
	Realized Income of Subsidiary	$ 323,000
	Non Controlling Interests Share of Net Income ($323,000*40%)	$    129,200

Part B
Consolidation Journal Entries
Date	General journal	Debit	Credit
Journal Entry for entity G
31-12-2018	Retained Earnings	$    27300
	Cost Of Goods Sold		$    273,00
Journal Entry for TI
31-12-2018	Sales	$ 390,000
	Cost Of Goods Sold		$ 390,000
Journal Entry for entity G
31-12-2018	Cost Of Goods Sold	$    343,00
	Inventory		$    343,00

Workings:
Gross Profit Margin= Markup Percentage / (1 + Markup Percentage)
Mark up	25% (Given)
Gross profit Margin=	25% /(1+25%)
Gross profit Margin=	20%