question archive Sub Company sells all its output at 20 percent above cost to Par Corporation
Sub Company sells all its output at 20 percent above cost to Par Corporation
Subject:AccountingPrice:4.87 Bought7
Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:
|
Year |
Sub Company’s Net Income |
Par Corporation’s Operating Income |
|
2006 |
150,000 |
225,000 |
|
2007 |
135,000 |
360,000 |
|
2008 |
240,000 |
450,000 |
Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 20X6, 20X7, and 20X8 respectively. Par Company reported ending inventory of $105,000, $157,500 and $180,000 for 20X6, 20X7, and 20X8 respectively. Par acquired 70 percent of the ownership of Sub on January 1, 20X6, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.
1) Based on the information given above, what will be the consolidated net income for 20X6?
2) Based on the information given above, what will be the consolidated net income for 20X7?
3) Based on the information given above, what will be the income assigned to controlling interest for 20X7?
4) Based on the information given above, what will be the income to noncontrolling interest for 20X8?
5) Based on the information given above, what will be the income to controlling interest for 20X8?
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Answer:
Part 1)
The value of consolidated income for 2006 is determined as below:
| Net Income of Sub for 2006 | 150,000 |
| Add Operating Income of Par for 2006 | 225,000 |
| Less Unrealized Profit on Inventory as at End of 2006 [105,000 - 105,000/(1+20%)] | 17,500 |
| Consolidated Income for 2006 | $357,500 |
____
Part 2)
The value of consolidated income for 2007 is determined as below:
| Net Income of Sub for 2007 | 135,000 |
| Add Operating Income of Par for 2007 | 360,000 |
| Unrealized Profit on Inventory as at End of 2006 [105,000 - 105,000/(1+20%)] | 17,500 |
| Less Unrealized Profit on Inventory as at End of 2007 [157,500 - 157,500/(1+20%)] | 26,250 |
| Consolidated Income for 2007 | $486,250 |
____
Part 3)
The value of controlling interest for 2007 is determined as below:
| Operating Income of Par for 2007 | 360,000 |
| Add Share in Sub's Income for 2007 [(135,000 + 17,500 - 26,250)*70%] | 88,375 |
| Income Assigned to Controlling Interest for 2007 | $448,375 |
____
Part 4)
The value of non-controlling interest for 2008 is calculated as follows:
Income to Non-Controlling Interest for 2008 = Net Income of Sub for 2008 + Unrealized Profit on Inventory as at End of 2007 - Unrealized Profit on Inventory as at End of 2007]*Non-Controlling Interest Percentage
=[240,000 + (157,500 - 157,500/(1+20%)) - (180,000 - 180,000/(1+20%))]*30% = $70,875
Part 5)
The value of controlling interest for 2008 is calculated as follows:
| Operating Income of Par for 2008 | 450,000 |
| Add Share in Sub's Income [(240,000 + 26,250 - 30,000 )*70%] | 165,375 |
| Controlling Interest for 2008 | $615,375 |
