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, but were sold by the end of the next period. The tax rate is 30%. The NCI adjustment required in relation to this intragroup transaction at the end of the next period is a credit to Retained earnings (opening balance) of:
A) Nil.
B) $1400
C) $2000
D) $280

Question

Quizplus · Accepted Answer

The NCI adjustment required in relation to this intragroup transaction at the end of the next period is a credit to Retained earnings (opening balance) of $280. This is calculated as the unrealized profit of $2,000 (selling price of $15,000 minus cost of $13,000) multiplied by the NCI percentage of 20% (100% - 80% holding by Maddie Ltd), and then multiplied by the tax rate of 30% to adjust for the tax effect. This gives $2,000 * 20% * 30% = $120. However, since the inventories were sold by the end of the next period, the tax effect is reversed, and the full unrealized profit attributable to the NCI needs to be adjusted, which is $2,000 * 20% = $400. The initial calculation was incorrect; the correct calculation for the NCI adjustment, considering the full profit attributable to NCI without the tax adjustment since the inventory has been sold, is $400, not $280. There seems to have been a mistake in the explanation provided, as the calculation did not account for the fact that the inventory was sold by the end of the next period, which means the tax adjustment would not apply in the same way as initially calculated. The correct answer should reflect the NCI's share of the unrealized profit without the need for a tax adjustment due to the sale completion.

Maddie Ltd Holds 80% Interest in Emily Ltd