Question

On January 1, 2017, Doone Corporation acquired 70 percent of the outstanding voting stock of Rockne Company for $378,000 consideration. At the acquisition date, the fair value of the 30 percent noncontrolling interest was $162,000 and Rockne's assets and liabilities had a collective net fair value of $540,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $160,000 in 2018. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $220,000 in 2017 and $320,000 in 2018. Approximately 40 percent of the inventory purchased during any one year is not used until the following year.

Part A:

What is the noncontrolling interest's share of Rockne's 2018 income?

Noncontrolling interest's share
Part B:

Prepare Doone's 2018 consolidation entries required by the intra-entity inventory transfers:(Prepare entry *G, TI, and G)

Answer 1

Answer is explained in the explanation section below.

Step-by-step explanation:

Solution:

Part A: First of all, we need to perform the conversion to gross profit rate as follows:

Conversion to Gross Profit Rate = 25% / 125%

Conversion to Gross Profit Rate = 20%

Non Controlling Interest's Share of Subsidiary Income

Reported income in 2018 = $160000

Add : 2017 Intra Company gross Profit Realized in 2018

($220000*40%*20%) = $17600

Less : Deferred Intra Company Gross Profit for 2018

($320000*40%*20%) = $25600

2018 Subsidiary Realized Income = $152000

Outside Ownership Percentage = 30%

Non Controlling Interest's Share of Subsidiary Income = $45600

Part B: Journal Entries:

Date: Dec. 31:

Particulars Debit Credit

Retained Earnings A/c Dr. 17600

To Cost of Goods Sold 17600

Sales A/c Dr. 320000

To Cost of Goods Sold 320000

Cost of Goods Sold A/c Dr. 25600

To Inventory 25600

Total 363200 363200