Question

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $396,000 in cash. The subsidiary's stockholders' equity accounts totaled $380,000 and the noncontrolling interest had a fair value of $44,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $25,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (four-year remaining life).

Brey reported net income from its own operations of $70,000 in 2016 and $86,000 in 2017. Brey declared dividends of $22,000 in 2016 and $26,000 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	75,000		$	145,000		$	31,000
2017		82,500			165,000			43,500
2018		95,000			190,000			65,000

At December 31, 2018, Pitino owes Brey $22,000 for inventory acquired during the period.

The following separate account balances are for these two companies for December 31, 2018, and the year then ended.

Note: Parentheses indicate a credit balance.

	Pitino				Brey
Sales revenues	$	(874,000	)		$	(396,000	)
Cost of goods sold		521,000				215,000
Expenses		186,000				70,000
Equity in earnings of Brey		(80,100	)			0
Net income	$	(247,100	)		$	(111,000	)
Retained earnings, 1/1/18	$	(500,000	)		$	(290,000	)
Net income (above)		(247,100	)			(111,000	)
Dividends declared		135,000				25,000
Retained earnings, 12/31/18	$	(612,100	)		$	(376,000	)
Cash and receivables	$	152,000			$	104,000
Inventory		285,000				166,000
Investment in Brey		510,975				0
Land, buildings, and equipment (net)		970,000				334,000
Total assets	$	1,917,975			$	604,000
Liabilities	$	(760,875	)		$	(30,000	)
Common stock		(545,000	)			(198,000	)
Retained earnings, 12/31/18		(612,100	)			(376,000	)
Total liabilities and equity	$	(1,917,975	)		$	(604,000	)

1. What was the annual amortization resulting from the acquisition-date fair-value allocations?

2. Were the intra-entity transfers upstream or downstream?

3. What intra-entity gross profit in inventory existed as of January 1, 2018?

4. What intra-entity gross profit in inventory existed as of December 31, 2018?

5. What amounts make up the $80,100 Equity Earnings of Brey account balance for 2018?

6. What is the net income attributable to the noncontrolling interest for 2018?

7. What amounts make up the $510,975 Investment in Brey account balance as of December 31, 2018?

8. Prepare the 2018 worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances.

9. Without preparing a worksheet or consolidation entries, determine the consolidation balances for these two companies.

Answer 1

SOLUTION:-

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consideration transferred Non controlling interest fair value subsidiary fair value at acquisition date book value fair value in excess of book value 396000 44000 440000 -380000 60000 Annual amortization Excess fair value assignments building patented technology totals Years 25000 10 years 35000 4 years 2500 8750 11250 82500 95000 gross profit on 2017 transfers (165000-82500) gross profit percentage gross profit on 2018 transfers (190000-95000) gross profit percentage 50% 50% 1 Inventory remaining 2017 transfers gross profit unrealised gross profit jan 1 2018 43500 50% 21750 Inventory remaining 2018 transfers gross profit unrealised gross profit dec 31 2018 65000 50% 32500 T L Brey's reported net income Excess fair value amortization Realised gross profit Deferred gross profit Addjusted subsidiary income ownership investment income-brey 111000 -11250 21750 -32500 89000 90% 80100 NCI - Subsidiary's income (89000*10%) 8900 396000 Investment In brey Net income of brey 2016 70000 2017186000 2018 111000 267000 -32500 234500 90% 211050 Unrealised gross profit Realised income 2016-2018 petinos ownership Exccess amortization (11000'3 years *90%) Dividends paid by brey -30375 2016 2017 2018 22000 26000 25000 73000 90% petinos ownership Investment In brey 31/12/2018 -65700 510975 198000 268250 Parth) common stock(brey) retained earnings 1/1/18(brey) (reduced by unrealised gorss profit) investment in brey (90%) Noncontrolling interest in brey(10%) 419625 46625

Parti) 1)Sales Revenues = $1,080,000 (total less $190,000 intra-entity sales) 2) Cost of Goods Sold = $556,750 (add book values less $190,000 in intra-entity purchases. Also, adjust for 2017 unrealized gross profit [subtract $21750) and 2018 unrealized gross profit (add $32,500)) 3) Expenses = $267,250 (add book values with $11,250 amortization for excess fair value allocations) 4)Investment Income-Brey = $0 (intra-entity balance is eliminated to include individual revenue and expense accounts of the subsidiary) 5)Noncontrolling Interest in Subsidiary's Net Income = $8900 (see f.) 6)Consolidated net income to parent = $247100 (consolidated revenues less consolidated cost of goods sold, expenses, and the noncontrolling interest's share of the subsidiary's income) 7) Retained Earnings, 1/1 = $500,000 (parent equity method balance) 8) Dividends Paid = $135,000 (parent balance only) 9) Retained Earnings, 12/31 = $612,100 (consolidated beginning balance plus net income less dividends paid) 10)Cash and Receivables = $234,000 (total less $22,000 intra-entity balance) 11) Inventory = $418,500 (total less ending unrealized gross profit) 12Investment in Brey = $0 (intra-entity balance is eliminated so that the individual assets and liabilities of the subsidiary can be reported) 13)Land, Buildings, and Equipment = $1,321,500 (add book values and include a $17,500 net allocation after 3 years of amortization) 14)Patented Technology = $8,750 (original allocation after 3 years of amortization ($8,750 per year]) 15)Total Assets = $1,982,750(add consolidated figures) 16) Liabilities = $768,875 (add book values less $22,000 intra-entity balance) 17)Noncontrolling Interest in Brey, 12/31 = $56,775 (10% of subsidiary's book value at beginning of period plus unamortized excess less beginning unrealized gross profit) plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends). 18)Common Stock = $545,000 (parent balance only) 19)Retained Earnings, 12/31 = $612,100 (see above) 20)Total Liabilities and Stockholders' Equity = $1,982,750 (summation

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