Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2014, for $448,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft’s identifiable assets and liabilities at a collective net fair value of $635,000 and the fair value of the 20 percent noncontrolling interest was $112,000. 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	750,000	470,000
Cost of goods sold	345,000	252,000
Operating expenses	161,000	116,000
Retained earnings 1/1/15	850,000	290,000
Inventory	357,000	121,000
Buildings (net)	369,000	168,000
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 $101,000 in 2014 and $121,000 in 2015. Of this inventory, Seacraft retained and then sold $39,000 of the 2014 transfers in 2015 and held $53,000 of the 2015 transfers until 2016. Determine balances for the following items that would appear on consolidated financial statements for 2015:

cost 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 $61,000 in 2014 and $91,000 in 2015. Of this inventory, $32,000 of the 2014 transfers were retained and then sold by Protrade in 2015, whereas $46,000 of the 2015 transfers were held until 2016. Determine balances for the following items that would appear on consolidated financial statements for 2015:

Cost of goods sold
inventory
net income attributable to noncontrolling interest

c. Protrade sells Seacraft a building on January 1, 2014, for $102,000, although its book value was only $61,000 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:

Cost of goods sold
Inventory
Net income attributable to noncontrolling interest

Answer 1

(a) COGS:-

Portrade COGS	345000
Seacraft COGS	252000
Elimination of 2015 Intra equity Transfer	(121000)
Recognition gross profit deferred in 2014 (2015 beginning inventory) 39000 transfer price / 1.6 = 24375 cost 39000 – 24375= 14625 intra equity gross profit	(14625)
Deferral of 2018 intra equity gross profit in ending inventory 53000 transfer price / 1.6 = 33125 cost 53000 – 33125 = 19875 intra equity gross profit	19875
	481250

Inventory :-

Portrade Inventory	357000
Seacraft Inventory	121000
Deferral of 2018 intra equity gross profit in ending inventory 53000 transfer price / 1.6 = 33125 cost 53000 – 33125 = 19875 intra equity gross profit	(19875)
	458125

Net Income Attributable to Non controlling Int :-

Seacraft sale	470000
Seacraft COGS	(252000)
Seacraft Operating Exp	(116000)
	102000
Net Income Attributable to Non controlling Int (102000 * 20%)	20400

(b) COGS:-

Portrade COGS	345000
Seacraft COGS	252000
Elimination of 2015 Intra equity Transfer	(91000)
Recognition gross profit deferred in 2014 (2015 beginning inventory) 32000 transfer price / 1.6 = 20000 cost 32000 – 20000= 12000 intra equity gross profit	(12000)
Deferral of 2015 intra equity gross profit in ending inventory 46000 transfer price / 1.6 = 28750 cost 46000 – 28750 = 17250 intra equity gross profit	17250
	511250

Inventory :-

Portrade Inventory	357000
Seacraft Inventory	121000
Deferral of 2015 intra equity gross profit in ending inventory 46000 transfer price / 1.6 = 28750 cost 46000 – 28750 = 17250 intra equity gross profit	(17250)
	460750

Net Income Attributable to Non controlling Int :-

Seacraft sale	470000
Seacraft COGS	(252000)
Seacraft Operating Exp	(116000)
[(46000 – 32000)/1.6] * 0.6	(5250)
	96750
Net Income Attributable to Non controlling Int (96750 * 20%)	19350

(c) Building :-

Portrade Building	369000
Seacraft Building	168000
(+) Depreciation on gain (102000 – 61000)/5	8200
(-) [102000 – 61000] - 8200	32800
	512400

Operating Exp :-

Portrade Operating Exp	161000
Seacraft Operating Exp	116000
(-) Depreciation on gain	8200
	268800