Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2010 and 2011, respectively. Pepe uses the equity method to account for its investment in Devin.
-Compute the noncontrolling interest in the net income of Devin for 2011.
A) $126,800.
B) $130,000.
C) $122,000.
D) $130,000 .
E) $129,600.

Question

Quizplus · Accepted Answer

The noncontrolling interest is 40% of Devin's net income. For 2011, this is 40% of $325,000, which equals $130,000. However, we must adjust for the unrealized gain on the intercompany sale of equipment. The gain is $9,000 ($45,000 - ($120,000 - $66,000)), and the annual depreciation adjustment is $1,000 ($9,000/9 years). Therefore, the adjusted noncontrolling interest is $130,000 - $1,000 = $129,600.

Pepe, Incorporated Acquired 60% of Devin Company on January 1