Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following:
- During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What portion of consolidated net income for 20X1 is attributable to Portia?

Question

Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following: 
- During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What portion of consolidated net income for 20X1 is attributable to Portia?

Quizplus · Accepted Answer

The gross margin on the goods sold is 40%, so the profit on the $3,000 of goods still in inventory is $1,200 (40% of $3,000). The consolidated net income should exclude this unrealized profit, so the portion attributable to Portia is $7,000 - $1,200 = $5,800. However, since the question asks for the portion attributable to Portia, we need to consider the gross margin on the goods sold to Portia, which is $7,000 - $2,800 (40% of $7,000) = $4,200. Therefore, the correct answer is $6,120, which accounts for the realized profit.