Question

Allison Corporation acquired 90 percent of Bretton on January 1, 2016. Of Bretton's total acquisition date fair value, $60,000 was allocated to undervalued equipment (with a 10-year remaining life) and $80,000 was attributed to franchises (to be written off over a 20-year period). Since the takeover, Bretton has transferred inventory to its parent as follows: Year 2016 2017 2018 Transfer Cost Price $ 45,000 $ 90,000 48,000 80,000 69,000 92,000 $ Remaining at Year-End 30,000 (at transfer price) 35,000 (at transfer price) 50,000 (at transfer price) On January 1, 2017, Allison sold Bretton a building for $50,000 that had originally cost $70,000 but had only a $30,000 book value at the date of transfer. The building is estimated to have a five-year remaining life (straight-line depreciation is used with no salvage value) Selected figures from the December 31, 2018, trial balances of these two companies are as follows: Bretton $400,000 220,000 80,000 Sales Cost of goods sold Operating expenses Investment income Inventory Equipment (net) Buildings (net) Allison $ 700,000 440,000 120,000 Not given 210,000 140,000 350,000 90,000 110,000 190,000 Determine consolidated totals for each of these account balances Totals Sales Cost of goods sold Operating expenses Investment income Inventory Equipment (net) Buildings (net)

Answer 1

Answer:

Excess amortization expenses
Equipment $60,000 ÷ 10 years = $6,000 per year
Franchises $80,000 ÷ 20 years = $4,000 per year
Annual excess amortizations $10,000

Intra-entity Gross Profit—Inventory, 1/1/18:
Gross profit ($80,000 – $48,000) = $32,000
Gross profit rate ($32,000 ÷ $80,000) = 40%
Remaining inventory = $35,000
Gross profit rate = 40%

Intra-entity gross profit in beginning inventory,1/1/18 = $14,000
Intra-entity Gross Profit—Inventory, 12/31/18:
Gross profit ($92,000 – $69,000) = $23,000
Gross profit rate ($23,000 ÷ $92,000) = 25%
Remaining inventory = $50,000
Gross profit rate = 25%
Intra-entity gross profit in ending inventory,12/31/18 = $12,500

Impact of Intra-Entity building transfer:

12/31/17—Transfer price figures
Transfer price = 50,000
Gain on transfer ($50,000 – $30,000) = 20,000
Depreciation expense ($50,000 ÷ 5 years) = 10,000
Accumulated depreciation = 10,000

12/31/18—Transfer price Figures
Depreciation expense = 10,000
Accumulated depreciation = 20,000

12/31/17—Historical cost Figures
Historical cos = t$70,000
Depreciation expense ($30,000 book value÷ 5 years) = 6,000
Accumulated depreciation ($40,000 +$6,000) = 46,000

12/31/18—Historical cost Figures
Depreciation expense = 6,000
Accumulated depreciation = 52,000

Consolidated Balances:

Sales = $1,008,000 (add the two book values and subtract $92,000 in intra-entity transfers)

Cost of Goods Sold = $566,500 (add the two book values and subtract$92,000 in intra-entity purchases. Subtract $14,000 because of the previous year deferred intra-entity gross profit and add $12,500 to defer the current year intra-entity gross profit in ending inventory.)

Operating Expenses = $206,000 (add the two book values and include the $10,000 excess amortization expenses but remove the $4,000 in excess depreciation expense [$10,000 – $6,000] created by building transfer)

Investment Income = $0 (the intra-entity balance is removed because the individual revenue and expense accounts of the subsidiary are included for consolidation

Inventory = $287,500 (add the two book values and subtract the$12,500 ending intra-entity gross profit)

Equipment (net) = $292,000 (add the two book values and include the$60,000 allocation From the acquisition-date Fair value less three years of excess amortizations)

Buildings (net) = $528,000 (add the two book values and subtract the$20,000 intra-entity gain on the transfer after two years of excess depreciation [$4,000 per year])