Question

ProForm acquired 70 percent of ClipRite on June 30, 2017, for $1,470,000 in cash. Based on ClipRite's acquisition-date fair value, an unrecorded intangible of $600,000 was recognized and is being amortized at the rate of $19,000 per year. No goodwill was recognized in the acquisition. The noncontrolling interest fair value was assessed at $630,000 at the acquisition date. The 2018 financial statements are as follows:

		ProForm				ClipRite
Sales	$	(1,030,000	)		$	(1,060,000	)
Cost of goods sold		650,000				515,000
Operating expenses		330,000				215,000
Dividend income		(56,000	)			0
Net income	$	(106,000	)		$	(330,000	)
Retained earnings, 1/1/18	$	(3,800,000	)		$	(1,080,000	)
Net income		(106,000	)			(330,000	)
Dividends declared		330,000				80,000
Retained earnings, 12/31/18	$	(3,576,000	)		$	(1,330,000	)
Cash and receivables	$	630,000			$	530,000
Inventory		520,000				930,000
Investment in ClipRite		1,470,000				0
Fixed assets		2,200,000				1,750,000
Accumulated depreciation		(400,000	)			(700,000	)
Totals	$	4,420,000			$	2,510,000
Liabilities	$	(544,000	)		$	(880,000	)
Common stock		(300,000	)			(300,000	)
Retained earnings, 12/31/18		(3,576,000	)			(1,330,000	)
Totals	$	(4,420,000	)		$	(2,510,000	)

ClipRite sold ProForm inventory costing $92,000 during the last six months of 2017 for $320,000. At year-end, 30 percent remained. ClipRite sells ProForm inventory costing $315,000 during 2018 for $480,000. At year-end, 10 percent is left. With these facts, determine the consolidated balances for the following:

	Consolidated Balance Sales Cost of goods sold Operating expenses Dividend income Net income attributable to noncontrolling interest Inventory Noncontrolling interest in subsidiary, 12/31/18

Answer 1

1) Sales : For getting the consolidated sales balance, we need to combine the Parent & subsidiary sales balance and eliminate intra company sales transaction. Here,

Proform sales = $1030000

Cliprite sales = $1060000

Intra company transfer during the year =$480000

So, consolidated sales = $1030000 + $1060000 - $480000

= $1610000

2) Cost of the goods sold : For getting the consolidated cost of the goods sold balance, we need to combine the Parent & subsidiary balances and eliminate intra company transfers and adjusting the unrealised profits generated. We can go by the following formula:

Consolidated cost of the goods sold = Parent balance + subsidiary balance - intra company transfers - beginning unrealised profit + ending unrealised profit.

where, Beginning unrealised profit is calculated as under:

Intra entity profit = $320000 - $92000 = $228000

Inventory remaining at year end = 30%

Beginning unrealised profit = 30 % * $228000 = $68400

Ending unrealised profit is calculated as under:

Intra entity profit = $480000 - $315000 = $165000

Inventory remaining at year end = 10%

Ending unrealised profit = 10 % * $228000 = $16500

Hence, consolidated cost of the goods sold = $650000 + $515000 - $480000 - $68400 + $16500

= $633100

3) Consolidated operating expense = Patrent operating expense + Subsidiary operating expense + Current years' amortization of intangible

= $330000 + $215000 + $19000

= $564000

4) Consolidated dividend income: Here the dividend income for Cliprite is nil & the dividend income given for proform is $56000. But, we will not take the dividend income of Proform because, it is actually the dividend received from Cliprire (i.e. 70% of $80000). It is an intra entity transfer and will not be included in the consolidated balance. So, the consolidated dividend income will be NIL here.

5) Net income attributable to non controlling interest: Here we will not include the intra entity transfers. We will adjust the net income for any excess acquisition date fair value amortizations.

Net income of Cliprite = $330000

Less: Amortization expene of intangible = ($19000)

Adjusted income = $311000

Non controlling interest in Ciprite earnings (@30%) = $93300

6) Consolidated inventory = Parent inventory + Subsidiary inventory - Ending unrealised profit. of current year

= $520000 + $930000 - $16500

=$ 1433500

7) Calculation of non controlling interest in subsidiary:

Book value of the subsidiary or Cliprite omn 1/ 1/ 2018 = Common stock + Retained earnings

= $300000 + $1080000

= $1380000

Now, Non controlling interest in subsidiary :

30% of Cliprite's book value of $1380000 = $414000

Excess intangible allocation as reduced by the = $ 177150

amortization of intangible for the first six months i.e

30% of $600000 - $9500

Non controlling interest in Cliprite earnings = $ 93300

Dividends (30% of $80000) = ($24000)

Non controlling interest in Ciprtite = $660450