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:

Answer 1

ANSWER

Consolidated Totals:

	Totals
Sales	$1,008,000
Cost of Goods sold	$566,000
Operating Expenses	$206,000
Investment Income	$0
Inventory	$287,500
Equipment (Net)	$292,000
Building (Net)	$528,000

Working Notes:

Excess Amortization Expenses
Equipment $60000/10 years = $6000 per year
Equipment $80000/20 years = $4000 per year
Annual excess amortizations $10000

Intra-equity Gross Profit-Inventory, 1/1/18:
Gross profit ($8000-$48000) = $32000
Gross profit rate ($32000/$80000) = 40%
remaining inventory = $35000
Gross profit rate = 40%
Intra-entity Gross Profit-Inventory, 1/1/18 (35000*40%) = 14000

Intra-entity Gross Profit-Inventory, 12/31/18:
Gross profit ($92000-$69000) = $23000
Intra-entity gross profit in ending inventory, 12/31/18 (50000*25%) = $12500

Impact of Intra-entity Building Transfer:
12/31/17 - Transfer price figures Transfer price = $50000
Gain on transfer ($50000-$30000) = 20000
Depreciation expense ($50000/5 years) = 10000
Accumulated depreciation = 10000

12/31/18 Transfer price figures
depreciation expense = 10000
Accumulated depreciation = 20000

12/31/17 Historical cost figures historical cost =$70000
depreciation expense ($30000 book value/5 years)=$6000
Accumulated depreciation ($40000 + $6000) =$46000

12/31/18 Historical cost figures
Depreciation expenses = 6000
Accumulated depreciation = 52000

Consolidated Balances

Sales = $1008000(700000+400000-92000)
(Add the two book values and subtract $92000 in intra entity transfers)

Cost of goods sold = $566500(440000+220000-92000-14000+12500)
(Add the two book values and subtract $92000 in intra entity purchase. Subtract $14000 because of the previous year deferred intra entity gross profit and add $12500 to defer the current year intra-entity gross profit in ending inventory.)

Operating Expenses = $206000(120000+80000+10000-4000)
(Add the two book values and include the $10000 excess amortization expenses but remove the $4000 in excess depreciation expense ($10000-$6000) created by building transfer)

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

Inventory = $287500(210000+90000-125000)
(Add the two book values and subtract the $12500 ending intra entity gross profit)

Equipment (net) = $292000 (140000+110000+60000-18000)
(Add the two book values and include the $60000 allocation from the acquisition date fair value less three years of excess amortizations)

Buildings (net) = $528000 (350000+190000+8000-20000)
(Add the two book values and subtract the $20000 intra entity gain on the transfer after two years of excess depreciation ($4000 per year))

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