Question

In: Accounting

Ariel owns 70% of Sabastian. During 2019, Sabastian sold 1000 units of inventory to Ariel for...

Ariel owns 70% of Sabastian. During 2019, Sabastian sold 1000 units of inventory to Ariel for $70 each. The units cost $50 to produce. A 12/31/2019 inventory count should indicate that 300 units remained in Ariels inventory. S reported a $50,000 net income in 2019. Ariel should recognize income in 2019 for which of the following amounts?

Investment in Sabastian $35,000

...investment income. $35,000

Investment in Sabastian $30,800

...Investment Income $30,800

21,000

None of the above

Solutions

Expert Solution

Solution:
CALCULATION OF INCOME RECOGNIZE IN THE YEAR 2019
Net income reported by Sabastian $                    50,000
Less: Elimination of inter-company profit (Notes) $                    20,000
Actual Profit of Sabastian $                    30,000
Share of Ariel = $ 30,000 X 70% = $                    21,000
Answer = Investment Income = $ 21,000
Working Notes:
Calculation of inter company profit generated during the period
Sales = (1000 Units X $ 70) $                    70,000
Less: Cost of sales (1000 Units X $ 50) $                    50,000
Profit Generated on inter company sales $                    20,000

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