driving me nuts

Exam Review - Question 6 Question ID#: 89470 T-Table F-Table 5% F-Table 2.5% Chi-Table Durbin-Watson Z-Table Z-Table Alt The California Wines owns 40% of a joint venture, Western Vineyards. Vineyard’s income statement for this period is as follows: Revenues $10,000 Less: cost of goods sold (COGS) 7,500 Gross profit $2,500 Less: selling and administrative expenses 500 Operating income $2,000 Less: interest expense 500 Earnings before taxes $1,500 Less tax 600 Net income $900 California Wines purchases 30% of the output of Vineyard. The amount of revenues, COGS, and net income of Vineyard to be included in the California Wine’s income statement under proportionate consolidation are, respectively: A) $0; $0; $0. B) $2,800; $1,800; $360. C) $4,000; $3,000; $360.

C? I’m not sure but the other options look wrong to me. I would’ve expected details of whether Cali Wines has sold the output it bought yet etc.

It’s B, so 2800 is ok. It’s ambiguous I know; you assume that Cali hasn’t sold output Take 10000*0.4 - 0.3*0.4*10000 = 2800 Now, to find COGS, it’s messed up. they take 7500*0.3 - 10000*0.3*0.4 = 1800 7500*0.3 makes sense, but 10000*.3*.4, wouldn’t the subtraction be based on profit? Also, wouldn’t net income change as a result of the unsold amounts or are the unsold amounts subtracted after net income?

> Now, to find COGS, it’s messed up. they take > 7500*0.3 - 10000*0.3*0.4 = 1800 Is this a typo because it actually works out to 1050 based on your numbers?

Sorry nirjraina, it’s late. It should be 7500*0.4 (for the % ownership of the COGS) So 7500*0.4 - 10000*0.3*0.4 = 1800

Ali, net income will not change because we made same adjustment to Revenues and COGS. we decreased revenues by [.4 * .3 *10000] and by same number COGS ll reduce…So there is no net effect on net income… Since output purchased is resold by Cali wines, we have to reduce the 30% of 40% (output) from COGS… This was trick question though…

Makes sense, thank you!