Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1,
ID: 2432754 • Letter: P
Question
Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1, 2014, when the book values of Shenley's assets and liabilities were equal to their fair values. The cost of the 80% interest was equal to 80% of the book value of Shenley's net assets. During 2014, Pouch sold merchandise that cost $70,000 to Shenley for $86,000. On December 31, 2014, three-fourths of the merchandise acquired from Pouch remained in Shenley's inventory. Separate incomes (investment income not included) of the two companies are as follows:
Pouch Shenley
Sales Revenue $180,000 $160,000
Cost of Goods Sold 120,000 90,000
Operating Expenses 17,000 21,000
Separate incomes $ 43,000 $ 49,000
What is Pouch's income from Shenley for 2014?
$39,200
$27,200
$49,000
$29,600
A.$39,200
B.$27,200
C.$49,000
D.$29,600
Explanation / Answer
Pouch sold merchandise that cost $70,000 to Shenley for $86,000 and made a profit of of $16,000.
3/4th of the inventory was held as closing stock by Shenley at year end. This also includes the profit made by Pouch which needs to be adjusted.
Therefore, profit element in the closing stock = $86,000 X 3/4 X $16,000/ $86,000
= $12,000
Separate income of Shenley for the year 2014 = $49,000
This includes the profit that Pouch made by selling the merchandise to Shenley. So we will eliminate that profit from Shenley's separate income to arrive at Pouch's share.
Adjusted Separate Income of Shenley for the year 2014 = $49,000 - $12,000
= $37,000
Pouch corporation acquired 80% interest in Shenley corporation.
Pouch's income from Shenley = $37,000 X 80%
= $29,600
Hence the correct answer is D.
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