Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $488,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $735,000 and the fair value of the 20 percent noncontrolling interest was $122,000. 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, 2018:

	Protrade			Seacraft
Sales	$	850,000		$	570,000
Cost of goods sold		395,000			302,000
Operating expenses		171,000			126,000
Retained earnings, 1/1/18		950,000			390,000
Inventory		367,000			131,000
Buildings (net)		379,000			178,000
Investment income	Not given			0

Each of the following problems is an independent situation:

Assume that Protrade sells Seacraft inventory at a markup equal to 40 percent of cost. Intra-entity transfers were $111,000 in 2017 and $131,000 in 2018. Of this inventory, Seacraft retained and then sold $49,000 of the 2017 transfers in 2018 and held $63,000 of the 2018 transfers until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

Assume that Seacraft sells inventory to Protrade at a markup equal to 40 percent of cost. Intra-entity transfers were $71,000 in 2017 and $101,000 in 2018. Of this inventory, $42,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $56,000 of the 2018 transfers were held until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

Protrade sells Seacraft a building on January 1, 2017, for $122,000, although its book value was only $71,000 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 2018:

Answer 1

Solution:

Determining the balances for the following items that would appear on consolidated financial statements for 2018:

Consolidated cost of goods sold:

Protrade’s cost of goods sold	$395,000
Seacraft’s cost of goods sold	$302,000
Elimination of 2018 intra-entity transfers	($131,000)
Reduction of beginning Inventory because of 2017 unrealized gross profit ($49,000 / 1.4 = $35,000 cost; $49,000 transfer price less $35,000 cost = $14,000 unrealized gross profit)	($14,000)
Reduction of ending inventory because of 2018 unrealized gross profit ($63,000 / 1.4 = $45,000 cost; $63,000 transfer price less $45,000 cost = $18,000 unrealized gross profit)	$18,000
Consolidated cost of goods sold	$570,000

Consolidated inventory:

Protrade book value	$367,000
Seacraft book value	$131,000
Deferendingunrealized gross profit	($18,000)
Consolidated inventory	$480,000

Noncontrolling interest in consolidated net income:

All the Intra Entity Sales are Downstream, the Deferrals do nor Affect Seacraft. Therefore, the Noncontrolling Interest is 20% of $142,000 Reported Net Income (revenues minus cost of goods sold andexpenses) or $28,400.

Determining the balances for the following items that would appear on consolidated financial statements for 2018:

Consolidated cost of goods sold:

Protrade’s cost of goods sold	$395,000
Seacraft’s cost of goods sold	$302,000
Elimination of 2018 intra-entity transfers	($101,000)
Reduction of beginning inventory because of 2017 unrealized gross profit ($42,000 / 1.4 = $30,000 cost; $42,000 transfer price less $30,000 cost = $12,000 unrealized gross profit)	($12,000)
Reduction of ending inventory because of 2018 unrealized gross profit ($56,000 / 1.4 = $40,000 cost; $56,000 transfer price less $40,000 cost = $16,000 unrealized gross profit)	$16,000
Consolidated cost of goods sold	$600,000

Consolidated inventory:

Protrade book value	$367,000
Seacraft book value	$131,000
Deferendingunrealized gross profit	($16,000)
Consolidated inventory	$482,000

Noncontrolling interest in consolidated net income:

All the Intra Entity Sales are Upstream, the the effect on Seacraft's net income must be reflected in the Noncontrolling interest computation.

Seacraft reported net income	$142,000
2017 unrealized gross profit realized in 2018	$12,000
2018 unrealized gross profit to be realized in 2019	($16,000)
Seacraft realized net income	$138,000
Outside ownership percentage	20%
Noncontrolling interest in consolidated net income	$27,600

Determining the balances for the following items that would appear on consolidated financial statements for 2018:

Buildings (net)	$526,400
Operating expenses	$286,800
Net income attributable to noncontrolling interest	$28,400