Ma’am,
In reference to your letter seeking assistance over the matter related to allocation of consolidated net income and procedures used to allocate income to the parent company and to the subsidiary's non-controlling shareholders, I am writing this memo to help you in understanding the matter in a better way.
Important to note, ASC 810 of the FASB Codification asserts that the consolidated net income of the consolidated entity, must be allocated according to the proportionate controlling and non-controlling interests. At the same time, earnings per share in the consolidated income statement is calculated on the basis of income allocated to controlling interest only.
In the given scenario, even though the sales figure of the consolidated entity increased by 2.5 times and the net income of the consolidated entity 52 percent, however, income allocated to controlling interest increased only by 38 percent. The reason for the difference in the increase in net income allocated to controlling interest is because the majority of the sales revenue was sourced from Jewel(subsidiary), which has a very low margin of only 10% percent compared to the parent entity, which has a profit margin of 60%. Moreover, even on account of increased sales revenue that were generated on low margin of 10%, the parent entity only received 55% of those increased profits.
Below I have highlighted the calculations relating to allocation of increased profits from additional sales of the consolidated entity, and how the same was allocated amongst the controlling interest and non-controlling interest:
I hope that now the issue will be more clear to you. If you still need any assistance, please let me know.
Regards,
References
ASC 810: A Consolidation Overview. (n.d.). Retrieved March 19, 2016, from http://www.gaaplogic.com/asc-810-a-consolidation-overview/
FASB. (n.d.). ASC 810 — Consolidation. Retrieved March 19, 2016, from http://www.iasplus.com/en-us/standards/fasb/broad-transactions/asc810
Kaplan Inc. (2016). Intercorporate Investments. In Kaplan, Schweser notes for CFA Exam-Financial Accounting and Analysis (pp. 59-70). USA: Kaplan Inc.
