Question

Pop Corporation purchased 80 percent of the outstanding voting common stock of Son Corporation on January 2, 2016, for $1,200,000 cash. Son’s balance sheets on this date and on December 31, 2016, are as follows:
January 2 December 31
Inventories 200000 80000
Other Current assets 200000 320000
Plant assets-net 800000 880000
Total assets 1200000 1280000
Liabilities 200000 240000
Capitial stock 600000 600000
Retained earnings 400000 440000
Total equity 1200000 1280000
ADDITIONAL INFORMATION
1. Pop uses the equity method of accounting for its investment in Son
2. Son’s 2016 net income and dividends were $280,000 and $240,000, respectively.
3. Son’s inventory, which was sold in 2016, was undervalued by $50,000 at January 2, 2016
REQUIRED
1. What is Pop’s income from Son for 2016?
2. What is the noncontrolling interest share for 2016

Answer 1

Answer:

Total Pops income from Son in 2016 = $30,720

Total non-controlling interest shares for 2016 = $241,280

Explanation:

Investment in Son as at Jan 2 2016 = $1,200,000

Correction of Stake in Son as a result of under valued inventory:

Total Assets on Jan 2, 2016 = $1,200,000.

Pop Corporation paid for 80% = $960,000 by paying $1,200,000

But an error of understatement revalues the Assets at $1,200,000 + $50,000 = $1,250,000. This would have equally raised the Net income by $50,000 and increased Total Equity to $1,250,000.

Pops stake in the Business is therefor $960,000 divided $1,250,000 = 76.8%

Using the Equity Method, Pop's income is:

We are not told if Pop paid additional cash to make up the undervalued stock, thus we will assume his adjusted stake in the business is 76.8%

Net income = 76.8% x $280,000 = $215,040

Less Dividend = 76.8% x $240,000 = $184,320

Total Pops income from Son = $30,720

The non-controlling interest shares will be:

Capital stock = 23.2% x $600,000 = $139,200

Retained Earnings = 23.2% x $440,000 = $102,080

Total non-controlling interest shares for 2016 = $241,280