Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2014, for $612,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft’s identifiable assets and liabilities at a collective net fair value of $765,000 and the fair value of the 20 percent noncontrolling interest was $153,000. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$880,000	$600,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . .	410,000	317,000
Operating expenses . . . . . . . . . . . . . . . . . . . .	174,000	129,000
Retained earnings, 1/1/15 . . . . . . . . . . . . . . .	980,000	420,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .	370,000	144,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . .	382,000	181,000
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 $114,000 in 2014 and $134,000 in 2015. Of this inventory, Seacraft retained and then sold $52,000 of the 2014 transfers in 2015 and held $66,000 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 $74,000 in 2014 and $104,000 in 2015. Of this inventory, $45,000 of the 2014 transfers were retained and then sold by Protrade in 2015, whereas $59,000 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 $128,000, although its book value was only $74,000 on this date. The building had a 5-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

Net Income Attributable to Noncontrolling Interest

Answer 1

Solution:

a.   Consolidated Cost of Goods Sold

   Protrade’s cost of goods sold ........................................................       $410,000

      Seacraft’s cost of goods sold .........................................................         317,000

      Elimination of 2015 intra-entity transfers .....................................        (134,000)

      Realized gross profit deferred in 2014 (2015 beginning inventory)

               $52,000 transfer price ÷ 1.6 = $32,500 cost

               $52,000 – $32,500 = $19,500 unrealized gross profit........          (19,500)

      Deferral of 2015 unrealized gross profit in ending inventory:

               $66,000 transfer price ÷ 1.6 = $41,250 cost

               $66,000 – $41,250 = $24,750 unrealized gross profit........           24,750

      Consolidated cost of goods sold ..................................................       $598,250

      Consolidated Inventory

            Protrade book value ....................................................................       $370,000

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

            Defer ending unrealized gross profit (see above) ...............          (24,750)

            Consolidated Inventory ..............................................................       $489,250

      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 $154,000 reported net income (revenues minus cost of goods sold and expenses) or $30,800.

b.   Consolidated Cost of Goods Sold

Protrade book value ..........................................................................       $410,000

      Seacraft book value ..........................................................................         317,000

      Elimination of 2015 intra-entity transfers .....................................        (104,000)

      Realized gross profit deferred in 2014 (2015 beginning inventory)

           $45,000 transfer price ÷ 1.6 = $28,125 cost

            $45,000 – $28,125 = $16,875 unrealized gross profit ..........          (16,875)

      Deferral of 2015 unrealized gross profit in ending inventory:

            $59,000 transfer price ÷ 1.6 = $36,875 cost

            $59,000 – $36,875 = $22,125 unrealized gross profit ..........          22,125

            Consolidated cost of goods sold                      $628,250

Consolidated inventory

      Protrade book value .............................................................................         $370,000

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

      Defer ending unrealized gross profit (see above) .....................          (22,125)

      Consolidated inventory ....................................................................       $491,875

      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 .........................................................       $154,000

      2014 unrealized gross profit realized in 2015 (above) ..............           16,875

      2015 unrealized gross profit deferred until 2016 (above) ........          (22,125)

      Seacraft realized net income ...........................................................       $148,750

      Outside ownership percentage ......................................................               20%

            Net income attributable to noncontrolling interest               $ 29,750

c. Consolidated buildings (net):

      Protrade’s buildings .........................................................                              $382,000

      Seacraft's buildings .....................................................                              181,000

     Remove write-up created by transfer

            ($128,000 – $74,000) ...............................................      $(54,000)

     Remove excess depreciation created by transfer

            ($54,000 unrealized gain ÷ 5-year

            remaining life × 2 years) .......................................         21,600         (32,400)

      Consolidated buildings (net) .....................................                            $530,600

Consolidated expenses:

      Protrade’s book value .................................................                            $174,000

      Seacraft's book value ..................................................                              129,000

      Remove excess depreciation on transferred building

            ($54,000 unrealized gain ÷ 5 year remaining life)                          (10,800)

      Consolidated expenses ..............................................                            $292,200

      Net income attributable to noncontrolling interest:

     Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's reported net income ($154,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 20 percent outside ownership will be allotted consolidated net income of $30,800 (20% × $154,000).