Question

Power Products Corporation, which sells a broad line of home detergent products, owns 75 percent of the stock of Scrub Soap Company. During 20X8, Scrub sold soap products to Power Products for $180,000, which it had produced for $120,000. Power Products sold $150,000 of its purchase from Scrub in 20X8 and the remainder in 20X9. In addition, Power Products purchased $240,000 of inventory from Scrub in 20X9 and resold $90,000 of the items before year-end. Scrub’s cost to produce the items sold to Power Products in 20X9 was $160,000.

Required
A. Give all worksheet consolidation entries needed for December 31, 20X9, to remove the effects of the intercompany inventory transfers in 20X8 and 20X9.
B. Compute the amount of income assigned to noncontrolling shareholders in the 20X8 and 20X9 consolidated income statements if Scrub reported net income of
$350,000 for 20X8 and $420,000 for 20X9.

Answer 1

Consolidation entries are required to adjust for intercompany transactions. Entry A and B remove the effects of intercompany inventory markups for 20X8 and 20X9, respectively. Noncontrolling shareholders' income in 20X8 is $87,500, and for 20X9, it's $105,000.

Step-by-step explanation:

Worksheet Consolidation Entries for December 31, 20X9

To remove the effects of the intercompany inventory transfers from 20X8 and 20X9, certain consolidation entries are necessary at year-end. These adjustments ensure that the consolidated financial statements present the financial position and results of operations as if the parent and its subsidiary operated as a single economic entity.

In 20X8, Power Products still has $30,000 of inventory from Scrub ($180,000 - $150,000). Since Scrub's cost was $120,000, we avoid recognizing the internal profit on unsold inventory. We must eliminate the $60,000 markup (30,000 unsold / 180,000 total sales × 60,000 profit), reducing both inventory and retained earnings.

Entry A:
Debit: Retained Earnings $60,000
Credit: Inventory $60,000

In 20X9, there are intercompany sales of $240,000, with only $90,000 being resold, leaving $150,000 in ending inventory. The cost associated with the $240,000 is $160,000, implying a markup of $80,000. Since $150,000 is unsold, we eliminate $50,000 of the markup ($150,000 unsold / $240,000 total sales × $80,000 profit).

Entry B:
Debit: Retained Earnings $50,000
Credit: Inventory $50,000

Noncontrolling Shareholders' Income for 20X8 and 20X9

To calculate noncontrolling shareholders' income, we must take 25% (100% - 75% ownership) of Scrub's net income, because Power Products doesn't own that portion.

For 20X8: Noncontrolling interest income is 25% of $350,000, which equals $87,500.

For 20X9: Noncontrolling interest income is 25% of $420,000, which equals $105,000.