Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2014, for $416,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft’s identifiable assets and liabilities at a collective net fair value of $555,000 and the fair value of the 20 percent noncontrolling interest was $104,000. 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, 2015:

	Protrade			Seacraft
Sales	$	670,000		$	390,000
Cost of goods sold		305,000			212,000
Operating expenses		153,000			108,000
Retained earnings, 1/1/15		770,000			210,000
Inventory		349,000			113,000
Buildings (net)		361,000			160,000
Investment income		Not given			0

Each of the following problems is an independent situation:

a.

Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost. Intra-entity transfers were $93,000 in 2014 and $113,000 in 2015. Of this inventory, Seacraft retained and then sold $31,000 of the 2014 transfers in 2015 and held $45,000 of the 2015 transfers until 2016.      Determine balances for the following items that would appear on consolidated financial statements for 2015: costs of goods sold inventory net income attributable to noncontrolling interest

       

b.

Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $53,000 in 2014 and $83,000 in 2015. Of this inventory, $24,000 of the 2014 transfers were retained and then sold by Protrade in 2015, whereas $38,000 of the 2015 transfers were held until 2016.      Determine balances for the following items that would appear on consolidated financial statements for 2015:

costs of goods sold inventory net income attributable to noncontrolling interest

       

c.	Protrade sells Seacraft a building on January 1, 2014, for $86,000, although its book value was only $53,000 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 2015:
	buildings (net) operating expenses costs of goods sold inventory net income attributable to noncontrolling interest

      

Answer 1

Part A

Consolidated Cost of Goods Sold

Protrade’s cost of goods sold............... ......... $305,000

Seacraft’s cost of goods sold.............................. 212,000

Elimination of 2015 intra-entity transfers........... (113,000)

Realized gross profit deferred in 2014 (2015 beginning inventory)

$31,000 transfer price ÷ 1.6 = $19375 cost

$31000– $19375 = $11625 unrealized gross profit.... (11625)

Deferral of 2015 unrealized gross profit in ending inventory:

$45,000 transfer price ÷ 1.6 = $28125 cost

$45000 – $28125 = $16875 unrealized gross profit.... 16875

Consolidated cost of goods sold ................................$409250

Consolidated Inventory

Protrade book value.................................. $349,000

Seacraft book value..................................... 113,000

Defer ending unrealized gross profit ............(16875)

Consolidated Inventory................................... $445,125

Net income attributable to noncontrolling interest:

Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling interest share is 20% of the $70000 (390000-212000-108000) reported net income (revenues minus cost of goods sold and expenses) or $14,000

Cost of goods sold	409250
Inventory	445125
Net income attributable to Noncontrolling interest	14000

Part B

Consolidated Cost of Goods Sold

Protrade book value................................. ............ $305,000

Seacraft book value.................................... ............212,000

Elimination of 2015 intra-entity transfers.............. (83,000)

Realized gross profit deferred in 2014(2015 beginning inventory)

$24,000 transfer price ÷ 1.6 = $15000 cost

$24,000 – $15,000 = $9,000 unrealized gross profit.......(9,000)

Deferral of 2015 unrealized gross profit in ending inventory:

$38,000 transfer price ÷ 1.6 = $23750 cost

$38000– $23750 = $14250 unrealized gross profit........14250

Consolidated cost of goods sold.............................. $439,250

Consolidated inventory

Protrade book value................................... $349000

Seacraft book value.................................... 144,000

Defer ending unrealized gross profit............(14250)

Consolidated inventory................................ $447,750

Net income attributable to noncontrolling interest

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..........................................70,000

2014 unrealized gross profit realized in 2015........... .. .. 9000

Unrealized gross profit current year.............................. (14250)

Net reported income.......................................................64750

Noncontrolling interest share.......................................... 20%

Net income attributable to Noncontrolling interest........ 12950

Cost of goods sold	439,250
Inventory	447,750
Net income attributable to Noncontrolling interest	12950

Part C

Calculating protade's gain = 86000-53000 =33000

Protade's depreciation = 53000/5 = 10600

Seacraft's depreciation = 86000/5 =17200

Excess depreciation = 17200-10600 = 6600

Protade's book value......................361000

Seacraft's book value .................... 160000

Gain.................................................. (33000)

Excess depreciation (2 years) .........13200

Building.............................................501,200

Operating expenses

Protade's book value......................... 153000

Seacraft's book value.......................... 108000

Annual excess depreciation................(6600)

Operating expenses............................. 254,400

Net income reported = 70000

Noncontrolling interest share = 20%

Net income attributable to Noncontrolling interest = 14000

Building	501,200
Operating expenses	254,400
Net income attributable to Noncontrolling interest	14000