Question

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

Answer 1

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