Question

Protrade Corporation acquired 70 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $441,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $775,000 and the fair value of the 30 percent noncontrolling interest was $189,000. No excess fair value over book value amortization accompanied the acquisition.

The following selected account balances are from the individual financial records of these two companies as of December 31, 2018:

	Protrade			Seacraft
Sales	$	890,000		$	610,000
Cost of goods sold		415,000			322,000
Operating expenses		175,000			130,000
Retained earnings, 1/1/18		990,000			430,000
Inventory		371,000			135,000
Buildings (net)		383,000			182,000
Investment income	Not given			0

Each of the following problems is an independent situation:

Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost. Intra-entity transfers were $115,000 in 2017 and $135,000 in 2018. Of this inventory, Seacraft retained and then sold $53,000 of the 2017 transfers in 2018 and held $67,000 of the 2018 transfers until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $75,000 in 2017 and $105,000 in 2018. Of this inventory, $46,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $60,000 of the 2018 transfers were held until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

Protrade sells Seacraft a building on January 1, 2017, for $130,000, although its book value was only $75,000 on this date. The building had a five-year remaining life and was to be depreciated using the straight-line method with no salvage value.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

a.	Cost of goods sold	$627,250selected answer incorrect
	Inventory	$471,125selected answer incorrect
	Net income attributable to noncontrolling interest	$40,200selected answer incorrect
b.	Cost of goods sold	$583,250selected answer incorrect
	Inventory	$473,750selected answer incorrect
	Net income attributable to noncontrolling interest	$38,625selected answer incorrect
c.	Buildings (net)	$517,800selected answer incorrect
	Operating expenses	$283,200selected answer incorrect
	Net income attributable to noncontrolling interest	$40,200selected answer incorrect

Answer 1

a.   Consolidated Cost of Goods Sold

      Protrade’s cost of goods sold ........................................................       $415,000

      Seacraft’s cost of goods sold .........................................................         322,000

      Elimination of 2018 intra-entity transfers .....................................        (135,000)

      Reduction of beginning Inventory because of

            2017 unrealized gross profit ($53,000 ÷ 1.6 = $33,125

            cost; $53,000 transfer price less $33,125

            cost = $19,875 unrealized gross profit) ..................................          (19,875)

     

Reduction of ending inventory because of

            2018 unrealized gross profit ($67,000 ÷ 1.6 = $41,875

            cost; $67,000 transfer price less $41,875

            cost = $25,125 unrealized gross profit) ..................................           25,125

                  Consolidated cost of goods sold ......................................       $607,250

      Consolidated Inventory

            Protrade book value ....................................................................       $371,000

            Seacraft book value ....................................................................         135,000

            Defer ending unrealized gross profit (see above) ...............          (25,125)

            Consolidated Inventory ..............................................................       $480,875

      Noncontrolling Interest in Subsidiary’s Net Income

      Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling interest is 30% of the $158,000 (revenues minus cost of goods sold and expenses) reported net income or $47,400.

b.   Consolidated Cost of Goods Sold

                  Protrade book value ..........................................................................       $415,000

      Seacraft book value ..........................................................................         322,000

      Elimination of 2018 intra-entity transfers .....................................        (105,000)

      Reduction of beginning inventory because of

            2017 unrealized gross profit ($46,000 ÷ 1.6 = $28,750

            cost; $46,000 transfer price less $28,750

            cost = $17,250 unrealized gross profit) ..................................          (17,250)

      Reduction of ending inventory because of

            2018 unrealized gross profit ($60,000 ÷ 1.6 = $37,500

            cost; $60,000 transfer price less $37,500

            cost = $22,500 unrealized gross profit) ..................................           22,500

      Consolidated cost of goods sold ..................................................       $637,250

      Consolidated inventory

      Protrade book value ..........................................................................       $371,000

      Seacraft book value ..........................................................................         135,000

      Defer ending unrealized gross profit (see above) .....................         (22,500)

            Consolidated inventory ..............................................................       $483,500

      Noncontrolling interest in subsidiary’s net income

      Since all intra-entity sales are upstream, the effect on Seacraft's net income must be reflected in the noncontrolling interest computation:

      Seacraft reported net income .........................................................       $158,000

      2017 unrealized gross profit realized in 2018 (above) ..............           17,250

      2018 unrealized gross profit to be realized in 2019 (above) ...         (22,500)

      Seacraft realized income ..................................................................       $152,750

      Outside ownership percentage ......................................................                30%

            Noncontrolling interest in Seacraft's net income ................         $45,825

c.   Consolidated buildings (net)

      Protrade’s buildings .....................................................                            $383,000

      Seacraft's buildings .....................................................                              182,000

      Remove write-up created by transfer

            ($130,000 – $75,000) ...............................................      $(55,000)

      Remove excess depreciation created by transfer

            ($55,000 unrealized gain over 5 year life)

            (2 years) .....................................................................          22,000         (33,000)

            Consolidated buildings (net) ...............................                            $532,000

      Consolidated expenses

      Protrade’s book value .................................................                            $175,000

      Seacraft's book value ..................................................                              130,000

      Remove excess depreciation on transferred building

            ($55,000) unrealized gain ÷ 5 years) ...................                               (11,000)

      Consolidated expenses ..............................................                            $294,000

      Noncontrolling interest in subsidiary’s net income

      Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's reported net income ($158,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 30 percent outside ownership will be allotted net income of $47,400 (30% × $158,000).