ProForm acquired 70 percent of ClipRite on June 30, 2017, for $1,470,000 in cash
ID: 2407256 • Letter: P
Question
ProForm acquired 70 percent of ClipRite on June 30, 2017, for $1,470,000 in cash. Based on ClipRite's acquisition-date fair value, an unrecorded intangible of $600,000 was recognized and is being amortized at the rate of $19,000 per year. No goodwill was recognized in the acquisition. The noncontrolling interest fair value was assessed at $630,000 at the acquisition date. The 2018 financial statements are as follows ProForm ClipRite Sales Cost of goods sold Operating expenses Dividend income $(1,030,000)(1,060,000) 515,000 215,000 650,000 330,000 56,000) $ (106,000) (106,000) $ (3,576,000) Net income $ (330,000) Retained earnings, 1/1/18 Net income Dividends declared $ (3,800,000) (1,080,000) (330,000) 330,000 80,000 $ (1,330,000) Retained earnings, 12/31/18 Cash and receivables Inventory Investment in ClipRite Fixed assets Accumulated depreciation $ 630,000 520,000 1,470,000 2,200,000 $ 530,000 930,000 1,750,000 400,000) 700,000) $ 4,420,000 2,510,000 Totals Liabilities Common stock Retained earnings, 12/31/18 $ (544,000) (300,000) 3,576,000) $ (4,420,000) $ (880,000) (300,000) (1,330,000) $ (2,510,000) TotalsExplanation / Answer
UNREALIZED GROSS PROFIT, 12/31/17: (upstream transfer)
Intra-entity gross profit ($320,000 – $92,000) .............................. $228,000
Inventory remaining at year's end ................................................. 30%
Unrealized intra-entity gross profit, 12/31/17 .................................... $68,400
UNREALIZED GROSS PROFIT, 12/31/18: (upstream transfer)
Intra-entity gross profit ($480,000 – $315,000) ............................ $165,000
Inventory remaining at year's end ................................................. 10%
Unrealized intra-entity gross profit, 12/31/18 .................................... $16,500
CONSOLIDATED TOTALS
§ Sales = $1,610,000 (combine amounts and eliminate intra-entity transfer)
§ Cost of goods sold:
Proform's COGS book value ........................................................... $650,000
ClipRite's COGS book value ........................................................... 515,000
Eliminate intra-entity transfers ....................................................... (480,000)
Realized gross profit deferred in 2017 ......................................... (68,400)
Deferral of 2018 unrealized gross profit ....................................... 16,500
Consolidated cost of goods sold ............................................ $633,100
§ Operating expenses = $564,000 (combine amounts and include intangible amortization for current year)
§ Dividend income = -0- (intra-entity transfer eliminated in consolidation)
§ Noncontrolling interest in consolidated net income: (impact of transfers is included because they were upstream)
ClipRite reported net income for 2018 .......................................... $330,000
Intangible amortization................................................................ (19,000)
2017 gross profit recognized in 2018 ..................................... 68,400
2018 gross profit deferred ......................................................... (16,500)
ClipRite realized income for 2018............................................. $362,900
Outside ownership ...................................................................... 30%
Noncontrolling interest in subsidiary net income ..................... $108,870
§ Inventory = $1,433,500 (combine amounts and defer the $16,500 ending unrealized gross profit)
§ Noncontrolling interest in subsidiary, 12/31/18
30% beginning book value $1,380,000, less $68,400
unrealized gross profit (30% × $1,311,600) for 2017......... $(393,480)
Excess intangible allocation (30% × $590,500*).................... (177,150)
Noncontrolling Interest in ClipRite’s earnings...................... (108,870)
Dividends (30% × $80,000).......................................................... 24,000
Total noncontrolling interest at 12/31/18................................ $(655,500)
* $600,000 intangible allocation net of $9,500 (½ year) amortization in 2017
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