Question

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2020, 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, 2021:

	Protrade			Seacraft
Sales	$	880,000		$	600,000
Cost of goods sold		410,000			317,000
Operating expenses		174,000			129,000
Retained earnings, 1/1/21		980,000			420,000
Inventory		370,000			134,000
Buildings (net)		382,000			181,000
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 $114,000 in 2020 and $134,000 in 2021. Of this inventory, Seacraft retained and then sold $52,000 of the 2020 transfers in 2021 and held $66,000 of the 2021 transfers until 2022.
  Determine balances for the following items that would appear on consolidated financial statements for 2021:
  Cost of Goods Sold
  Inventory
  Net Income Attributable to Noncontrolling Interest
• Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $74,000 in 2020 and $104,000 in 2021. Of this inventory, $45,000 of the 2020 transfers were retained and then sold by Protrade in 2021, whereas $59,000 of the 2021 transfers were held until 2022.
  Determine balances for the following items that would appear on consolidated financial statements for 2021:
  Cost of Goods Sold
  Inventory
  Net Income Attributable to Noncontrolling Interest
• Protrade sells Seacraft a building on January 1, 2020, for $128,000, although its book value was only $74,000 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 2021:
  Buildings (net)
  Operating Expenses
  Net Income Attributable to Noncontrolling Interest

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

Answer 1

a. Cost of goods sold              $598,250 Inventory                             $479,250 Net income attributable to noncontrolling interest        $30,800 b. Cost of goods sold             $628,250 Inventory                            $481,875 Net income attributable to noncontrolling interest        $29,750 c. Buildings (net)                   $530,600 Operating expenses          $292,200 Net income attributable to noncontrolling interest         $30,800

Answer 2

a.   Consolidated Cost of Goods Sold

      Protrade’scost of goods sold...................................................................         $410,000

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

      Elimination of 2018intra-entity transfers ................................................         (134,000)

      Recognizedgross profit deferred in 2017

      (2018 beginning inventory)

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

            $52,000 – $32,500= $19,500 intra-entity gross profit.......................           (19,500)

      Deferral of2018intra-entity gross profit

      In ending inventory:

            $66,000transferprice÷1.6 = $41,250cost

            $66,000 – $41,250 = $24,750 intra-entity 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 intra-entity gross profit (see above) ............................           (24,750)

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

      Net income attributable to non-controlling interest:

      Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the non-controlling interest share is 20% of the $154,000reported 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 2018intra-entity transfers ................................................         (104,000)

      Recognized gross profit deferred in 2017

       (2018 beginning inventory)

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

            $45,000 – $28,125= $16,875intra-entitygross profit.........................           (16,875)

      Deferral of 2018intra-entity gross profit in ending inventory:

            $59,000transferprice ÷1.6 = $36,875 cost

            $59,000 – $36,875= $22,125intra-entitygross profit.........................             22,125

      Consolidated cost of goods sold ............................................................         $628,250

Consolidated inventory

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

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

      Deferending intra-entity gross profit (see above) ...................................           (22,125)

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

      Net income attributable to non-controlling interest

      Since all intra-entity sales are upstream, the effect on Seacraft's net income must be reflected in the non-controlling interest computation:

      Seacraft reported net income...................................................................         $154,000

      2017intra-entitygross profit recognized in 2018 (above) ........................             16,875

      2018intra-entitygross profit deferred until2019 (above) ........................           (22,125)

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

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

      Net income attributable to non-controlling interest.................................           $29,750

c.   Consolidated buildings (net):

      Protrade’sbuildings.............................................................                              $382,000

      Seacraft'sbuildings..............................................................                                181,000

      Remove write-up created by transfer

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

      Remove excess depreciation created by transfer

            ($54,000 intra-entity 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

            ($54,000intra-entity gain ÷ 5 year remaining life)........          (10,800)

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

      Net income attributable to non-controlling interest:

      Because the transfer was made downstream, it has no effect on the non-controlling 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).