Problem 5-29 ProForm acquired 60 percent of ClipRite on June 30, 2017, for $840,

Question

Problem 5-29

ProForm acquired 60 percent of ClipRite on June 30, 2017, for $840,000 in cash. Based on ClipRite's acquisition-date fair value, an unrecorded intangible of $700,000 was recognized and is being amortized at the rate of $12,000 per year. No goodwill was recognized in the acquisition. The noncontrolling interest fair value was assessed at $560,000 at the acquisition date. The 2018 financial statements are as follows:

ProForm ClipRite Sales $ (960,000 ) $ (920,000 ) Cost of goods sold 615,000 480,000 Operating expenses 260,000 180,000 Dividend income (48,000 ) 0 Net income $ (133,000 ) $ (260,000 ) Retained earnings, 1/1/18 $ (2,000,000 ) $ (1,010,000 ) Net income (133,000 ) (260,000 ) Dividends declared 260,000 80,000 Retained earnings, 12/31/18 $ (1,873,000 ) $ (1,190,000 ) Cash and receivables $ 560,000 $ 460,000 Inventory 450,000 860,000 Investment in ClipRite 840,000 0 Fixed assets 1,300,000 1,400,000 Accumulated depreciation (200,000 ) (350,000 ) Totals $ 2,950,000 $ 2,370,000 Liabilities $ (777,000 ) $ (880,000 ) Common stock (300,000 ) (300,000 ) Retained earnings, 12/31/18 (1,873,000 ) (1,190,000 ) Totals $ (2,950,000 ) $ (2,370,000 ) Consolidated Balance Sales Cost of goods sold Operating expenses Dividend income Net income attibutable to noncontrolling interest Inventory Noncontrolling interest in subsidiary, 12/31/18

Explanation / Answer

Consolidated Sales:          Parent $960,000          Subsidiary $920,000 Consolidated sales before adjustment $1,880,000 Less: Upstream inventory transfers ($410,000)                        Total consolidated sales $1,470,000 Consolidated cost of goods sold:          Parent $615,000          Subsidiary $480,000          Elimination of upstream inventory transfers ($410,000)          Deferred gross profit of realized ($49,500)          Unrealized gross profit of 2018 deferred $13,000                      Total consolidated cost of goods sold $648,500 Consolidated operating expenses:          Parent $260,000          Subsidiary $180,000          Add: Amortization of intangibles $12,000                      Total consolidated operating expenses $452,000 Dividend income $0 Net income attributable to noncontrolling interest         Net income reported by subsidiary $260,000         Amortization of intangibles ($12,000)         Gross profit of 2017 recognized $49,500         Gross profit of 2018 deferred ($13,000)         Net income $284,500          Percentage of noncontrolling interest 40% Total net income attributable to noncontrolling interest $113,800 Consolidated inventory:          Parent $450,000          Subsidiary $860,000          Gross profit of 2018 deferred ($13,000)                Total consolidated inventory: $1,297,000 Noncontrolling interest in subsidiary            40% of beginning book value ($300,000 + $1,010,000 $49,500) × 40% $504,200            Excess intangible allocation ($700,000 $6,000) × 40% ($277,600)            Noncontrolling interest in subsidiary's earnings ($113,800)            Dividends ($80,000 × 40%) $32,000           Total noncontrolling interest in subsidiary $144,800 Notes: Unrealized gross profit at the end of 2017          Intra-entity gross profit ($250,000 $85,000) $165,000          Percentage of unsold inventory at the end of 2017 30%              Unrealized intra-entity gross profit at the end of 2017 $49,500 Unrealized gross profit at the end of 2017          Intra-entity gross profit ($410,000 $280,000) $130,000          Percentage of unsold inventory at the end of 2018 10%              Unrealized intra-entity gross profit at the end of 2018 $13,000

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