Maddie Ltd holds 80% interest in Emily Ltd. Emily Ltd sells inventory to Maddie Ltd during the year for $15 000. The inventories originally cost $13 000 when purchased from an external party. At the end of the year all inventories are still on hand. The tax rate is 30%. The NCI adjustment to this intragroup transaction is a debit to NCI of:
A) Nil.
B) $280
C) $400
D) $600

Question

Quizplus · Accepted Answer

Since Maddie Ltd holds an 80% interest in Emily Ltd, it means that the non-controlling interest (NCI) in Emily Ltd holds the remaining 20% interest. When Emily Ltd sells inventory to Maddie Ltd, the transaction is considered an intragroup transaction. Therefore, in order to determine the NCI adjustment, we need to eliminate the effect of the intragroup transaction.

The cost of the inventory sold by Emily Ltd to Maddie Ltd is $13 000, but it was sold for $15 000. Therefore, Emily Ltd made a profit of $2 000 on the intragroup transaction. However, since Maddie Ltd holds an 80% interest in Emily Ltd, the portion of the profit attributable to Maddie Ltd is $1 600 (80% of $2 000). The remaining $400 (20% of $2 000) is attributable to NCI in Emily Ltd.

As NCI holds 20% of the profit, the NCI adjustment will be a debit to NCI of $400 x 30% (tax rate) = $120. Therefore, the answer is B) $280, which is the amount left after the NCI adjustment.

Maddie Ltd Holds 80% Interest in Emily Ltd