Assume that on January 1, 2019, a Reporting Company acquires a 35 percent interest in a Legal Entity for $392,000 cash. The fair value of the 65 percent interest not acquired by the Reporting Company is $728,000. The fair value and book value of the identifiable net assets of the Legal entity equals $1,120,000. The Reporting Company has a right to 35 percent of the reported income (loss) of the Legal Entity. The Legal Entity is determined to be a VIE, and the Reporting Company is determined to be primary beneficiary. For the year ended December 31, 2019, the Reporting Company and the VIE reported the following pre-consolidation income statements assuming that the Reporting Company applies the equity method: Sales Costs of goods sold Gross profit Operating expenses Equity method income (loss) from VIE Net income Reporting Company VIE $1,232,000 $336,000 (739,200) (224,000) 492,800 112,000 (197,120) (33,600) (39,760) 0 $255,920 $78,400

Assume that on January 1, 2019, a Reporting Company acquires a 35 percent interest in a Legal Entity for $392,000 cash. The fair value of the 65 percent interest not acquired by the Reporting Company is $728,000. The fair value and book value of the identifiable net assets of the Legal entity equals $1,120,000. The Reporting Company has a right to 35 percent of the reported income (loss) of the Legal Entity. The Legal Entity is determined to be a VIE, and the Reporting Company is determined to be primary beneficiary. For the year ended December 31, 2019, the Reporting Company and the VIE reported the following pre-consolidation income statements assuming that the Reporting Company applies the equity method: Sales Costs of goods sold Gross profit Operating expenses Equity method income (loss) from VIE Net income Reporting Company VIE $1,232,000 $336,000 (739,200) (224,000) 492,800 112,000 (197,120) (33,600) (39,760) 0 $255,920 $78,400

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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Elimination of intercompany profits for variable interest entities (VIES) and voting interest entities
Assume that on January 1, 2019, a Reporting Company acquires a 35 percent interest in a Legal Entity for $392,000 cash. The
fair value of the 65 percent interest not acquired by the Reporting Company is $728,000. The fair value and book value of the
identifiable net assets of the Legal entity equals $1,120,000. The Reporting Company has a right to 35 percent of the
reported income (loss) of the Legal Entity. The Legal Entity is determined to be a VIE, and the Reporting Company is
determined to be primary beneficiary. For the year ended December 31, 2019, the Reporting Company and the VIE reported
the following pre-consolidation income statements assuming that the Reporting Company applies the equity method:
Sales
Costs of goods sold
Gross profit
Operating expenses
Equity method income (loss) from VIE
Net income
Reporting
Company VIE
$1,232,000 $336,000
(739,200) (224,000)
492,800 112,000
(197,120) (33,600)
(39,760)
0
$255,920
$78,400
Assume that the Legal Entity's income statement for the year ended December 31, 2019 includes sales to the Reporting
Company, and $168,000 of these sales are still in Reporting Company's ending inventory. On intercompany sales, the Legal
Entity earns a gross profit equal to 40 percent of sales price. Assume that all of these intercompany items are in the ending
inventory of the Reporting Company on December 31, 2019.
a. Show how the Equity method income (loss) from VIE is computed.
Note: Use a negative sign with answer only to indicate equity method loss from VIE.
Reporting company's portion of VIE's net income $
Impact of intercompany sales in equity income $
Equity method income (loss) from VIE
$
b. Compute the amount of consolidated net income $ 280,840 x
27,440
2,520 *
24,920 x
c. Compute the amount of consolidated net income attributable to the noncontrolling interest $ 172,788
d. Compute the amount of consolidated net income attributable to the controlling interest $ 93,052 x
x

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Step 2: (a) Show how the Equity method income (loss) from VIE is computed:

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Step 3: (b) Compute the amount of consolidated net income:

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Step 4: (c) Compute the amount of consolidated net income attributable to the noncontrolling interest:

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Step 5: (d) Compute the amount of consolidated net income attributable to the controlling interest:

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e. How would your answers to items (b) through (d) change if the Legal Entity is a "voting interest entity?"
Consolidated net income
$
Consolidated net income attributable to noncontrolling interest $
Consolidated net income attributable to controlling interest $
0
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