ProForm acquired 60 percent of ClipRite on June 30, 2017, for $600,000 in cash.
ID: 2342023 • Letter: P
Question
ProForm acquired 60 percent of ClipRite on June 30, 2017, for $600,000 in cash. Based on ClipRite's acquisition-date fair value, an unrecorded intangible of $400,000 was recognized and is being amortized at the rate of $11,000 per year. No goodwill was recognized in the acquisition. The noncontrolling interest fair value was assessed at $400,000 at the acquisition date. T he 2018 financial statements are as follows: ProForm ClipRite Sales Cost of goods sold Operating expenses Dividend incone (810,000) (620,000) 405,000 540,000 110,000 (36,000) 105,000 Net income $ (196,000) (110,000) s(1,000,000) (860,000) Retained earnings, 1/1/18 Set income Dividends declared (110,000) $(1,086,000 (910,000) $ 310,000 (196,000) 110,000 60,000 - Retained earnings, 12/31/18 Cash and receivables Inventory Investment in ClipRite Fixed assets Accumulated depreciation $ 410,000 300,000 600,000 1,100,000 710,000 650,000 500 000) (250,000) Totals Liabi1ities Common stock Retained earnings, 12/31/18 $ 1,910,000 1,420,000 (624,000) (310,000) (200, 000) (200,000) (1.086 000) 1910,000) Totals $ (1,910,000) $(1,420,000) ClipRite sold ProForm inventory costing $70,000 during the last six months of 2017 for $100,000. At year-end, 30 percent remained ClipRite sells ProForm determine the consolidated balances for the following: inventory costing $205,000 during 2018 for $260,000. At year-end, 10 percent is left. With these facts, Prev 1 of 9 lli NextExplanation / Answer
It is essential to understand why unrealized profit needs to be eliminated. In this case,when Cliprite sold goods to Proform at a profit, Cliprite would have recorded a profit in their accounts and the Proform's balance sheet will include inventories at their cost to Proform,which is the amount at which the goods were purchased from Cliprite.Keeping in mind that the objective of consolidation is to present the results of several connected companies as a single entity,this will lead to certain problems:
Cliprite (Subsidiary) sold goods costing $205,000 to Proform( The Parent) for $260,000, realizing a profit of $55,000 in their accounts.The amount of those goods still left in inventory is 10%, which means that 90% of those goods have been sold and their profits have been realized. But 10% hasn't been sold and hence,the portion of profit is unrealized
Unrealized Profit= $55,000*10%=$5500
SALES
Cliprite recorded sales of $260,000 when it sold goods to Proform.But as far as the group is concerned, no sale took place. Therefore the intra-group trading sales value has to reduced from Cliprite's sales revenue and then added to Proform's sales revenue
=810,000+620,000-260,000
=1170,000
COST OF GOODS SOLD:
During 2017,Cliprite sold goods costing $70,000 to Proform at $100,000,with a profit of $30,000.30% of inventory still remains at year end, therefore the unrealised profit in this transfer is $9,000(30,000*30%) This amount would still have been included in the opening stock of Proform in 2018.This will have to be eliminated.
Proform recorded the cost of the goods purchased from Cliprite at $205,000 and also the unrealized profit of $5500 in their closing stock valuation,but as the far is group is concerned, no purchase has taken place.Therefore,we need to eliminate the cost(205,000) from purchases and UP(5,500)from closing stock of Proform and add it to the COGS of Cliprite
COGS=(Opening stock-UP(2017)) + (Purchases-cost)-(Closing stock-UP(2018))-----Opening the brackets,
= OS+Purchases-CS-cost+UP(2018)-UP(2017)
Consolidated COGS=Proform's COGS+Cliprite's COGS-205,000+5500-9,000
= 540,000+405,000-260,000+5500-9000
=$681,500
OPERATING EXPENSES:
All you have to do is just add both of the company's expenses together
=110,000+105,000
=$215,000
DIVIDEND INCOME:
Dividends paid to the Parent by the subsidiary are cancelled on consolidation.
The dividends declared by Cliprite is given to be $60,000.Since Proform owns 60% of Cliprite,Proform is entitled to 60% of their dividends declared,which is $36,000(60,000*60%).
Proform's dividend income is given to be $36,000, which means the entire $36,000 dividend income Proform received is from Cliprite, which has to cancelled on elimination.
Therefore, the consolidated dividends figure is $0
NET INCOME ATTRIBUTABLE TO NCI:
While 60% of Cliprite is owned by Proform, the remaining 40% are owned by outside investors are known as the non-controlling interest(NCI). The NCI is entitled to 40% of Cliprit's net income.
Cliprit's net income for 2018 will include the unrealised profit which arose during 2018.This will have to eliminated before calculating the NCI's share of Cliprite's net income.
=(110,000-5500)*40%
=$41,800
INVENTORY:
Proform's inventory still includes 10% of the goods purchased from Cliprite, and the UP on that transfer needs to be eliminated and added to Cliprite's inventory figure
=(300,000-5500)+710,000
=1004500
NCI in SUBSIDIARY at 12/31/2018:
The Non-controlling interest in Cliprite can be calculated by adding the Fair Value of NCI at acquisition and the NCI's share of Cliprite's post-acquisition retained earnings(RE).
For this, we need to find out the pre-acquisiton retained earnings.
Goodwill=Purchase consideration+Fair value(FV) of NCI at acquisition-Net assets of Subsidiary at acquisition
--Goodwill is given to be 0--
-Net assets of Subsidiary= Common stock+Pre-acquisition Retained earnings+unrecorded Intangible asset--
0=600,000+400,000-[ 200,000+Pre-acquisition Retained earnings+400,000]
Pre-acquisition Retained earnings=$400,000
RE at 1/1/18=$860,000
Therefore,Post acquisition Retained earnings=860,000-400,000
=$460,000
This figure will contain the carried forward unrealized profit from 2017 ($9,000) and The unrealized profit from 2018($5500) will be included in the Cliprite's net income, both of which will have to be eliminated.
RE at 12/31/2018= (Post-acquistion retained earnings-$9000)+(net income-$5500)-dividends
=460,000-9000+110,000-5500-60,000
=$496,000
The NCI's share of Cliprite's post-acquisition retained earnings is $198,400( 496,000*40%)
Therefore,NCI in subsidiary at 12/31/2018=FV of NCI at acquisiton+198,400
=400,000+198400
=$598,400
ConsolidatedBalance Sales 1,170,000 Cost of goods sold 681,500 Operating Expenses 215,000 Dividend Income 0 Net income attributable to non-controlling interest 41800 Inventory 1,004,500 Noncontrolling interest in subsidiary 12/32/2018 598,400Related Questions
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