CPK or CPA needed

[QuantJock_MBA]

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) $4,000; $3,000; $360.
C) $2,800; $1,800; $360.

 

[cfaboston28]

C? Dont we take out 30% of vineyard?

 

[swaptiongamma]

Revenue = 10000*0.40 - 10000*0.40*0.30 = 2800
Cogs = 7500*0.40 - 10000*0.40*0.30 = 1800
NI = 900*0.40 = 360
C?

 

[QuantJock_MBA]

C is right. Can you explain why we subtract the 10k*.3*.4

 

[cpk123]

has been solved many times before.
Since West has sold stuff to California and also purchased output…
Sales of Calif -> would need to exclude portion of Sales not used.
COGS of Calif -> would need to exclude the portion of Sales not used.
Net Income: Simple 900 * .4 = 360
Revenues: 0.4 * 10000 - .3 * .4 * 10000 = 4000 - 1200 = 2800
COGS: 0.4 * 7500 - 0.3 * 0.4 * 10000 = 1800
Choice C.

 

[tomsimons]

This may be obious, but I’m not getting it… why do you subtract 10K*.3*.4 from COGS rather tha 7,500*.3*.4?

 

[QuantJock_MBA]

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:
It is the amount purchased. One purchases the portion of revenue, not COGS. I THINK!

 

[Super I]

This is an example of the type of question to make people who aren’t sure what the basic rules are waste their time.
You know proportionate consolidation means include something, so knock out A.
You know that you need an intercompany sales adj so knock out B.
On the old test with 4 choices you’d have two possible answers left and would have to srew around with calculations. Here just put down C and if you really know the concepts there is no need to waste time crunching numbers. You don’t get points for showing your work in the margin of the booklet.

 

[urymoto]

it wont be that easy in the exam Super…CFA wont give us a stupid answer possibilty