Potter Company acquired 75 percent ownership of Snape Corporation in 20X5,at underlying book value.On that date,the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snape Corporation.Potter purchased inventory from Snape for $150,000 on July 24,20X6,and resold 90 percent of the inventory to unaffiliated companies on November 11,20X6,for $160,000.Snape produced the inventory sold to Potter for $120,000.The companies had no other transactions during 20X6.
-Based on the information given above,what amount of consolidated net income will be assigned to the controlling interest for 20X6?

Question

Quizplus · Accepted Answer

First, we need to calculate the goodwill in the acquisition of Snape Corporation:
Fair value of noncontrolling interest = 0.25 x book value of Snape Corporation
= 0.25 x (100% - 75%) x (book value of Snape Corporation)
= 0.25 x 25% x (book value of Snape Corporation)
= 0.0625 x (book value of Snape Corporation)

We know that Potter acquired 75% ownership of Snape at book value. Therefore, the fair value of Potter's ownership interest in Snape is:
Fair value of Potter's ownership interest = 75% x (book value of Snape Corporation) + Goodwill
= 75% x (book value of Snape Corporation) + 0.0625 x (book value of Snape Corporation)
= 0.8125 x (book value of Snape Corporation)

Next, we calculate the consolidated net income:
Potter's net income from Snape = 75% x (Snape's net income)
= 75% x ($40,000)
= $30,000
(We assume Snape's net income is the same as the profit from the inventory sold to Potter)

Consolidated net income = Potter's net income from Snape + Potter's profit from reselling inventory
= $30,000 + 90% x ($160,000 - $150,000) - $120,000
= $45,250

Therefore, the amount of consolidated net income assigned to the controlling interest for 20X6 is $45,250.

Potter Company Acquired 75 Percent Ownership of Snape Corporation in 20X5,at