Question

In computing the noncontrolling interest's share of consolidated net income, how should the subsid- iary's net income be adjusted for intra-entity transfers?

a. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to
computing the noncontrolling interest's allocation.
b.The subsidiary's reported net income is adjusted for the impact of all transfers prior to computing
the noncontrolling interest's allocation.
c. The subsidiary's reported net income is not adjusted for the impact of transfers prior to comput-
ing the noncontrolling interest's allocation.
d. The subsidiary's reported net income is adjusted for the impact of downstream transfers prior to computing the noncontrolling interest's allocation.

Answer 1

To calculate the noncontrolling interest's share of consolidated net income, the subsidiary's reported net income must be adjusted for all intra-entity transfers, not just upstream or downstream transfers, to eliminate any unrealized profits or losses within the economic entity.

Step-by-step explanation:

In computing the noncontrolling interest's share of consolidated net income, the correct approach is b. The subsidiary's reported net income is adjusted for the impact of all transfers prior to computing the noncontrolling interest's allocation. Intra-entity transfers can involve upstream or downstream transactions, and both can affect the reported net income. To ensure accurate consolidation, any profits resulting from these intra-entity transactions that are not yet realized outside of the economic entity need to be eliminated. This means adjusting the subsidiary's net income for any intra-entity profit or loss before calculating the share attributable to the noncontrolling interest. By doing this, the consolidated net income reflects a more accurate picture of economic gains and losses that have been realized by the group as a whole.