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 $490,000 cash. The fair value of the 65 percent interest not acquired by the Reporting Company is $910,000. The fair value and book value of the identifiable net assets of the Legal entity equals $1,400,000. 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:

	Reporting Company	VIE
Sales	$1,540,000	$420,000
Costs of goods sold	(924,000)	(280,000)
Gross profit	616,000	140,000
Operating expenses	(246,400)	(42,000)
Equity method income (loss) from VIE	(49,700)	0
Net income	$319,900	$98,000

Assume that the Legal Entitys income statement for the year ended December 31, 2019 includes sales to the Reporting Company, and $210,000 of these sales are still in Reporting Companys 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	Answer
Impact of intercompany sales in equity income	Answer
Equity method income (loss) from VIE	Answer

b. Compute the amount of consolidated net income $Answer

c. Compute the amount of consolidated net income attributable to the noncontrolling interest $Answer

d. Compute the amount of consolidated net income attributable to the controlling interest $Answer

e. How would your answers to items (b) through (d) change if the Legal Entity is a voting interest entity?

Consolidated net income	Answer
Consolidated net income attributable to noncontrolling interest	Answer
Consolidated net income attributable to controlling interest	Answer

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