Question

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $423,000 in cash. The subsidiary's stockholders' equity accounts totaled $407,000 and the noncontrolling interest had a fair value of $47,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $31,000. 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 $73,000 in 2016 and $89,000 in 2017. Brey declared dividends of $23,500 in 2016 and $27,500 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	78,000		$	160,000		$	34,000
2017		90,000			180,000			46,500
2018		123,000			205,000			40,000

At December 31, 2018, Pitino owes Brey $25,000 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	$	(880,000	)		$	(411,000	)
Cost of goods sold		524,000				218,000
Expenses		186,300				76,000
Equity in earnings of Brey		(101,835	)			0
Net income	$	(271,535	)		$	(117,000	)
Retained earnings, 1/1/18	$	(506,000	)		$	(296,000	)
Net income (above)		(271,535	)			(117,000	)
Dividends declared		138,000				28,000
Retained earnings, 12/31/18	$	(639,535	)		$	(385,000	)
Cash and receivables	$	155,000			$	107,000
Inventory		300,000				181,000
Investment in Brey		558,630				0
Land, buildings, and equipment (net)		973,000				337,000
Total assets	$	1,986,630			$	625,000
Liabilities	$	(787,095	)		$	(18,000	)
Common stock		(560,000	)			(222,000	)
Retained earnings, 12/31/18		(639,535	)			(385,000	)
Total liabilities and equity	$	(1,986,630	)		$	(625,000	)

What amounts make up the $101,835 Equity Earnings of Brey account balance for 2018?

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

What amounts make up the $558,630 Investment in Brey account balance as of December 31, 2018?

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

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

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

2. Without preparing a worksheet or consolidation entries, determine the consolidation balances for these two companies. ALL INFORMATION NEEDED IS GIVEN.

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four parts of the question should be answered. Kindly take note of it.

Part E

Brey’s reported net income	117000
Excess fair value amortization	(11100)
Realized gross profit	23250
Deferred gross profit	(16000)
Adjusted subsidiary income	113150
Ownership	90%
Investment income—Brey	$101835

Equity method is used by Pitino because $101835 is neither 90% of Brey's reported Income nor 90% of the dividends paid by Brey

Part F

Brey’s adjusted income	113150
Outside ownership	10%
Noncontrolling interest in subsidiary's net income	11315

Part G

Investment in Brey (consideration transferred)		423000
Net Income of Brey
Reported 2016	73000
2017	89000
2018	117000
Total	279000
Unrealized gross profit, 12/31/18	(16000)
Realized income 2016-2018	263000
Petino’s ownership	90%	236700
Excess amortizations ($11100 × 3 years × 90%)		(29970)
Dividends paid by Brey
2016	23500
2017	27500
2018	28000
Total	79000
Pitino's ownership	90%	(71100)
Investment in Brey, 12/31/18		$558630

Part H

No.	General journal	Debit	Credit
Entry S	Common Stock (Brey)	222000
	Retained Earnings, 1/1/18 (Brey) (296000-23250)	272750
	Investment in Brey ((222000+272750)*90%)		445275
	Noncontrolling interest in Brey ((222000+272750)*10%)		49475

notes:

Gross profit on 2017 transfers ($180000-90000)	90000
Gross profit percentage (90000/180000)	50%
Inventory remaining, 12/31/17	46500
Gross profit percentage	50%
Unrealized gross profit, January 1, 2018	23250

Gross profit on 2018 transfers ($205000-123000)	82000
Gross profit percentage (82000/205000)	40%
Inventory remaining, 12/31/18	40000
Gross profit percentage	40%
Unrealized gross profit, December 31, 2018	16000