Question

llison 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	Cost		Transfer Price		Remaining at Year-End
2016	$	45,000	$	90,000	$	30,000 (at transfer price)
2017		48,000		80,000		35,000 (at transfer price)
2018		69,000		92,000		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:

	Allison		Bretton
Sales	$	700,000	$	400,000
Cost of goods sold		440,000		220,000
Operating expenses		120,000		80,000
Investment income	Not given			0
Inventory		210,000		90,000
Equipment (net)		140,000		110,000
Buildings (net)		350,000		190,000

Determine consolidated totals for each of these account balances.

Sales

Cost of Goods Sold

Operating expenses

Inventory income

Inventory

Equipment (net)

Building (net)

Answer 1

Excess amortization expenses

Equipment $60,000 ÷ 10years =$6,000per year

Franchises $80,000 ÷ 20years =$4,000per 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 cost$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])

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