Protrade Corporation acquired 70 percent of the outstanding voting stock of Seac

ID: 2571838 • Letter: P

Question

Protrade Corporation acquired 70 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $378,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $595,000 and the fair value of the 30 percent noncontrolling interest was $162,000. 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:

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 $97,000 in 2017 and $117,000 in 2018. Of this inventory, Seacraft retained and then sold $35,000 of the 2017 transfers in 2018 and held $49,000 of the 2018 transfers until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

B.) Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $57,000 in 2017 and $87,000 in 2018. Of this inventory, $28,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $42,000 of the 2018 transfers were held until 2019.
Determine balances for the following items that would appear on consolidated financial statements for 2018:

C.) Protrade sells Seacraft a building on January 1, 2017, for $94,000, although its book value was only $57,000 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:

Protrade Seacraft Sales $ 710,000 $ 430,000 Cost of goods sold 325,000 232,000 Operating expenses 157,000 112,000 Retained earnings, 1/1/18 810,000 250,000 Inventory 353,000 117,000 Buildings (net) 365,000 164,000 Investment income Not given 0

Explanation / Answer

a. Consolidated Cost of Goods Sold

Protrade’s cost of goods sold ........................................................ $325,000

Seacraft’s cost of goods sold ......................................................... 232,000

Elimination of 2018 intra-entity transfers ..................................... (117,000)

Reduction of beginning Inventory because of

2017 unrealized gross profit ($35,000 ÷ 1.6 = $21,875

cost; $35,000 transfer price less $21,875

cost = $13,125 unrealized gross profit) .................................. (13,125)

Reduction of ending inventory because of

2018 unrealized gross profit ($49,000 ÷ 1.6 = $30,625

cost; $49,000 transfer price less $30,625

cost = $18,375 unrealized gross profit) .................................. 18,375

Consolidated cost of goods sold ...................................... $445,250

Consolidated Inventory

Protrade book value .................................................................... $353,000

Seacraft book value .................................................................... 117,000

Defer ending unrealized gross profit (see above) ............... (13,125)

Consolidated Inventory .............................................................. $456,875

Noncontrolling Interest in Subsidiary’s Net Income

Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling interest is 30% of the $86,000 (revenues minus cost of goods sold and expenses) reported net income or $25,800.

b. Consolidated Cost of Goods Sold

Protrade book value .......................................................................... $325,000

Seacraft book value .......................................................................... 232,000

Elimination of 2018 intra-entity transfers ..................................... (87,000)

Reduction of beginning inventory because of

2017 unrealized gross profit ($28,000 ÷ 1.6 = $17,500

cost; $28,000 transfer price less $17,500

cost = $10,500 unrealized gross profit) .................................. (10,500)

Reduction of ending inventory because of

2018 unrealized gross profit ($42,000 ÷ 1.6 = $26,250

cost; $42,000 transfer price less $26,250

cost = $15,750 unrealized gross profit) .................................. 15,750

Consolidated cost of goods sold .................................................. $475,250

Consolidated inventory

Protrade book value .......................................................................... $353,000

Seacraft book value .......................................................................... 117,000

Defer ending unrealized gross profit (see above) ..................... (15,750)

Consolidated inventory .............................................................. $454,250

Noncontrolling interest in subsidiary’s net income

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 ......................................................... $86,000

2017 unrealized gross profit realized in 2018 (above) .............. 10,500

2018 unrealized gross profit to be realized in 2019 (above) ... (15,750)

Seacraft realized income .................................................................. $80,750

Outside ownership percentage ...................................................... 30%

Noncontrolling interest in Seacraft's net income ................ $24,225

c. Consolidated buildings (net)

Protrade’s buildings ..................................................... $365,000

Seacraft's buildings ..................................................... 164,000

Remove write-up created by transfer

($94,000 – $57,000) ................................................. $(37,000)

Remove excess depreciation created by transfer

($37,000 unrealized gain over 5 year life)

(2 years) ..................................................................... 14,800 (22,200)

Consolidated buildings (net) ............................... $506,800

Consolidated expenses

Protrade’s book value ................................................. $157,000

Seacraft's book value .................................................. 112,000

Remove excess depreciation on transferred building

($37,000) unrealized gain ÷ 5 years) ................... (7,400)

Consolidated expenses .............................................. $261,600

Noncontrolling interest in subsidiary’s net income

Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's reported net income ($86,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 30 percent outside ownership will be allotted net income of $25,800 (30% × $86,000).

Cost of goods sold

445,250

Inventory

456,875