REFERENCE: Ref.05_01
Pot Co.holds 90% of the common stock of Skillet Co.During 2009,Pot reported sales of $1,120,000 and cost of goods sold of $840,000.For this same period,Skillet had sales of $420,000 and cost of goods sold of $252,000.Also during 2009,Pot sold merchandise to Skillet for $140,000.The subsidiary still possesses 40% of this inventory at the end of 2009.Pot had established the transfer price based on its normal markup.
-Dalton Corp.owned 70% of the outstanding common stock of Shrugs Inc.On January 1,2007,Dalton acquired a building with a ten-year life for $420,000.No salvage value was anticipated and the building was to be depreciated on the straight-line basis.On January 1,2009,Dalton sold this building to Shrugs for $392,000.At that time,the building had a remaining life of eight years but still no expected salvage value.In preparing financial statements for 2009,how does this transfer affect the calculation of Dalton's share of consolidated net income?

Question

Quizplus · Accepted Answer

The transfer of the building from Dalton to Shrugs results in a gain of $28,000 for Dalton ($392,000 - $364,000). However, only 70% of this gain is recognized in consolidated net income, or $19,600 ($28,000 x 70%). The remaining 30% of the gain, or $8,400 ($28,000 x 30%), is deferred and recognized over the remaining life of the building. Therefore, consolidated net income must be reduced by $49,000 ($19,600 + $8,400 + $21,000).

REFERENCE: Ref.05_01 Pot Co.holds 90% of the Common Stock of Skillet Co.During