Purkle Corporation purchases merchandise from its 94%-owned subsidiary, Sterkel

Question

Purkle Corporation purchases merchandise from its 94%-owned subsidiary, Sterkel Company, at the subsidiary’s normal gross profit rate of 25%. Purkle’s accounting records for Year 2 show the following with respect to purchases from Sterkel (note that Purkle purchases from Sterkel so the amounts shown below are at the markup up price that Purkle paid – the markup was 25% of those markup prices):

            Inventories, Jan. 1, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     0

            Year 1 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    400,000

            Inventories, Dec. 31, Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     40,000

            Year 2 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     600,000

            Inventories, Dec. 31, Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       80,000         

1. Prepare a working paper elimination for Purkle Corporation and subsidiary on December 31, Year 1 for the intercompany sale of inventory.

2. Prepare a working paper elimination for Purkle Corporation and subsidiary on December 31, Year 2 for the intercompany sale of inventory.

3. If Sterkel reports on its trial balance $130,000 of net income for Year 2, assuming no other adjustments other than for the intercompany sale of inventory, what would be the Non-Controlling Interest Share of Consolidated Net Income for Year 2?

Explanation / Answer

When Holding company purchase goods from its subsidiary company then unrealised profit on unsold stock should be eliminated since this is ultimately shared by holding and minority shareholders.

1) Year 1 elimination of unrealised profit from consolidated profit and minority will be as follows:

40000/125*25=8000 is the total unrealised profit

8000*94/100=7520will be eliminated from consolidated profit and loss

8000-7520=480 from minority

2) Year 2 80000/125*25=16000 unrealised profit

16000*94/100=15040  eliminated from consolidated profit and loss

16000-15040=960 from minority

3) profit share of noncontrolling (minority shareholder)=130000*6/100=7800

Less: Unrealised profit of Year2 = (960)

Actual profit of minority= 7800-960=6840$

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