Pitino acquired 90 percent of Brey’s outstanding shares on January 1, 2009, in exchange for $342,000 in cash. The subsidiary’s stockholders’ equity accounts totaled $326,000 and the noncontrolling interest had a fair value of $38,000 on that day. However, a building (with a nine-year remaining life) in Brey’s accounting records was undervalued by $18,000. Pitino assigned the rest of the excess fair value over book value to Brey’s patented technology (six-year remaining life).
Brey reported net income from its own operations of $64,000 in 2009 and $80,000 in 2010. Brey paid dividends of $19,000 in 2009 and $23,000 in 2010. Brey sells inventory to Pitino as follows:
Year | Cost to Brey | Transfer Price to Pitino | Inventory Remaining at Year-End (at transfer price) |
2009 | $69,000 | $115,000 | $25,000 |
2010 | 81,000 | 135,000 | 37,500 |
2011 | 92,800 | 160,000 | 50,000 |
At December 31, 2011, Pitino owes Brey $16,000 for inventory acquired during the period. The following separate account balances are for these two companies for December 31, 2011, and the year then ended. Credits are indicated by parentheses.
| Pitino | Brey |
Sales revenues | $ (862,000) | $(366,000) |
Cost of goods sold | 515,000 | 209,000 |
Expenses | 185,400 | 67,000 |
Investment income—Brey | (68,400) | -0- |
Net income | $ (230,000) | $ (90,000) |
Retained earnings, 1/1/11 | $ (488,000) | $(278,000) |
Net income (above) | (230,000) | (90,000) |
Dividends paid | 136,000 | 27,000 |
Retained earnings, 12/31/11 | $ (582,000) | $(341,000) |
Cash and receivables | $ 146,000 | $ 98,000 |
Inventory | 255,000 | 136,000 |
Investment in Brey | 450,000 | -0- |
Land, buildings, and equipment (net) | 964,000 | 328,000 |
Total assets | $ 1,815,000 | $ 562,000 |
Liabilities | $ (718,000) | $ (71,000) |
Common stock | (515,000) | (150,000) |
Retained earnings, 12/31/11 | (582,000) | (341,000) |
Total liabilities and equities | $(1,815,000) | $(562,000) |
Answer each of the following questions:
a. What was the annual amortization resulting from the acquisition-date fair-value allocations?
b. Were the intra-entity transfers upstream or downstream?
c. What unrealized gross profit existed as of January 1, 2011?
d. What unrealized gross profit existed as of December 31, 2011?
e. What amounts make up the $68,400 Investment Income—Brey account balance for 2011?
f. What was the noncontrolling interest’s share of the subsidiary’s net income for 2011?
g. What amounts make up the $450,000 Investment in Brey account balance as of December 31, 2011?
h. Prepare the 2011 worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances.
i. Without preparing a worksheet or consolidation entries, determine the consolidation balances for these two companies.
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