Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $428,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $585,000 and the fair value of the 20 percent noncontrolling interest was $107,000. 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	$	700,000		$	420,000
Cost of goods sold		320,000			227,000
Operating expenses		156,000			111,000
Retained earnings, 1/1/18		800,000			240,000
Inventory		352,000			116,000
Buildings (net)		364,000			163,000
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 60 percent of cost. Intra-entity transfers were $96,000 in 2017 and $116,000 in 2018. Of this inventory, Seacraft retained and then sold $34,000 of the 2017 transfers in 2018 and held $48,000 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 60 percent of cost. Intra-entity transfers were $56,000 in 2017 and $86,000 in 2018. Of this inventory, $27,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $41,000 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 $92,000, although its book value was only $56,000 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:

	a. Cost of goods sold Inventory Net income attributable to noncontrolling interest b. Cost of goods sold Inventory Net income attributable to noncontrolling interest c. Buildings (net) Operating expenses Net income attributable to noncontrolling interest

Answer 1

ANSWER

a).

Consolidated Cost of Goods Sold

      Protrade’s cost of goods sold ............................................................         $320,000

      Seacraft’s cost of goods sold .............................................................           227,000

      Elimination of 2018 intra-entity transfers..........................................         (116,000)

      Realized gross profit deferred in 2017

      (2018 beginning inventory)

               $34,000 transfer price ÷ 1.6 = $21,250 cost

               $34,000 – $21,250 = $12,750 unrealized gross profit................           (12,750)

Deferral of 2018 unrealized gross profit

in ending inventory:

               $48,000 transfer price ÷ 1.6 = $30,000 cost

               $48,000 – $30,000 = $18,000 unrealized gross profit................             18,000

Consolidated cost of goods sold .......................................................         $436,250

Consolidated Inventory

            Protrade book value .......................................................................         $352,000

            Seacraft book value ........................................................................           116,000

            Defer ending unrealized gross profit (see above) ......................           (18,000)

            Consolidated Inventory .................................................................         $450,000

  

b).

Consolidated Cost of Goods Sold

        Protrade book value .............................................................................         $320,000

      Seacraft book value ..............................................................................           227,000

      Elimination of 2018 intra-entity transfers ..........................................         (86,000)

      Realized gross profit deferred in 2017

      (2018 beginning inventory)

            $27,000 transfer price ÷ 1.6 = $16875 cost

            $27,000 – $16875 = $10,125 unrealized gross profit ..................           (10,125)

Deferral of 2018 unrealized gross profit

   in ending inventory:

$41,000 transfer price ÷ 1.6 = $25,625 cost

            $41,000 – $25,625 = $15375 unrealized gross profit ..................            15375

Consolidated cost of goods sold .......................................................         $466,250

      Consolidated inventory

      Protrade book value .............................................................................         $352,000

      Seacraft book value ..............................................................................           116,000

      Defer ending unrealized gross profit (see above) ............................           (15,375)

      Consolidated inventory .......................................................................         $452,625

      Net income attributable to noncontrolling interest

      Seacraft reported net income .............................................................         $82,000

      2017 unrealized gross profit realized in 2018 (above) .....................            10,125

      2018 unrealized gross profit deferred until 2019 (above) ................           (15,375)

      Seacraft realized net income ...............................................................         $76,750

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

      Net income attributable to noncontrolling interest...........................         $ 15,350

c).

   Consolidated buildings (net):

      Protrade’s buildings .........................................................                             $364,000

      Seacraft's buildings ........................................................                                163,000

      Remove write-up created by transfer

            ($92,000 – $56,000) ...................................................        $(36,000)

      Remove excess depreciation created by transfer

            ($36,000 unrealized gain ÷ 5-year

            remaining life × 2 years) ..........................................          14,400          (21,600)

      Consolidated buildings (net) ..........................................                              $505,400

      Consolidated expenses:

      Protrade’s book value .....................................................                             $156,000

      Seacraft's book value ......................................................                                111,000

Remove excess depreciation on transferred building

($36,000 unrealized gain ÷ 5 year remaining life)....        (7200)

      Consolidated expenses ..................................................                              $259,800

*****************THANK YOU**************