Question

In: Accounting

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1,...

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

Solutions

Expert Solution

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).


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