Arnold Ltd holds a 60% interest in Burford Ltd. Burford Ltd sells inventory to Arnold Ltd during the year for $10,000. The inventory originally cost $7,000. At the end of the year, 50% of the inventory is still on hand. The tax rate is 30%. The NCI share of net income adjustment required, in relation to this transaction, is a decrease of:

Question

Quizplus · Accepted Answer

First, we need to calculate the profit made by Burford on the sale of inventory to Arnold:
Revenue from sale = $10,000
Cost of sales (original cost of inventory) = $7,000
Profit = Revenue - Cost of sales = $3,000

Since Arnold holds a 60% interest in Burford, the proportionate share of profit that should be included in Arnold's net income is 60% x $3,000 = $1,800. The remaining 40% is attributable to the NCI.

However, since 50% of the inventory is still on hand at year-end, we need to adjust the profit to reflect the remaining inventory. The adjustment is calculated as follows:
Unrealized profit = 50% x $3,000 = $1,500
Adjustment to profit = Unrealized profit x (1 - tax rate) = $1,500 x (1 - 0.3) = $1,050

Therefore, the NCI share of net income adjustment required is $1,050 x 40% = $420, which represents a decrease in NCI share of net income. Thus, the correct answer is B ($420).

Arnold Ltd Holds a 60% Interest in Burford Ltd