[lindadolphin]

Wiley Question –

On September 1, Year 2, Phillips, Inc., issued common stock in exchange for 20% of Sago, Inc.’s outstanding common stock. On July 1, Year 4, Phillips issued common stock for an additional 75% of Sago’s outstanding common stock. Sago continues in existence as Phillips’ subsidiary. How much of Sago’s Year 4 net income should be reported as accruing to Phillips?

A) 20% of Sago’s net income to June 30 and all of Sago’s net income from July 1 to December 31

B) 20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31

C) 95% of Sago’s net income

D) All of Sago’s net income

answer is B, why not A?

the explaination on book is:

The requiremnt is to determine how much of Sago’s year 2 net income should be reported as acruing to Philips. In an acquisition, consolidated net income reflects the parent’s net income to the date of combination and both entities’ income after the combination. Philips, Inc. can only recognize the net income Sago, based on their 20% interest, up to the date of combination. However, after the date of combination they will recognize 95% net income, their new ownership interest.

My question is why A is not correct. Should it recognized all the income when they investment more than 50% of the sub?

 

 

[SpartanCPA]

B is the answer.

The reason being is that when you consolidate, although you account for all 100% of the subsidiary's net assets, there is a 5% non-controlling interest. Non-controlling interests are accounted under the equity method, so therefore it would account for 5% of the net income.

AUD - 01/18/14 - 81
BEC - 05/29/14 - 85
FAR - 07/18/14 - 81
REG - 11/18/14 - 80

Becker CPA Review
NINJA Audio
Michigan State University

[SpartanCPA]

B is the answer.

The reason being is that when you consolidate, although you account for all 100% of the subsidiary's net assets, there is a 5% non-controlling interest. Non-controlling interests are accounted under the equity method, so therefore it would account for 5% of the net income.

AUD - 01/18/14 - 81
BEC - 05/29/14 - 85
FAR - 07/18/14 - 81
REG - 11/18/14 - 80

Becker CPA Review
NINJA Audio
Michigan State University

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