Question

In: Accounting

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $495,000...

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $495,000 in cash. The subsidiary's stockholders' equity accounts totaled $479,000 and the noncontrolling interest had a fair value of $55,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $47,000. 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 $81,000 in 2016 and $97,000 in 2017. Brey declared dividends of $27,500 in 2016 and $31,500 in 2017.

Year Cost to Brey Transfer Price to Pitino Inventory Remaining at Year-End (at transfer price)
2016 $ 86,000 $ 200,000 $ 42,000
2017 110,000 220,000 54,000
2018 147,000 245,000 45,000

At December 31, 2018, Pitino owes Brey $33,000 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 $ (896,000 ) $ (451,000 )
Cost of goods sold 532,000 226,000
Expenses 187,100 92,000
Equity in earnings of Brey (119,970 ) 0
Net income $ (296,870 ) $ (133,000 )
Retained earnings, 1/1/18 $ (522,000 ) $ (312,000 )
Net income (above) (296,870 ) (133,000 )
Dividends declared 146,000 53,000
Retained earnings, 12/31/18 $ (672,870 ) $ (392,000 )
Cash and receivables $ 163,000 $ 115,000
Inventory 340,000 221,000
Investment in Brey 634,410 0
Land, buildings, and equipment (net) 981,000 345,000
Total assets $ 2,118,410 $ 681,000
Liabilities $ (845,540 ) $ (3,000 )
Common stock (600,000 ) (286,000 )
Retained earnings, 12/31/18 (672,870 ) (392,000 )
Total liabilities and equity $ (2,118,410 ) $ (681,000 )
  1. What was the annual amortization resulting from the acquisition-date fair-value allocations?

  2. Were the intra-entity transfers upstream or downstream?

  3. What intra-entity gross profit in inventory existed as of January 1, 2018?

  4. What intra-entity gross profit in inventory existed as of December 31, 2018?

  5. What amounts make up the $119,970 Equity Earnings of Brey account balance for 2018?

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

  7. What amounts make up the $634,410 Investment in Brey account balance as of December 31, 2018?

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

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

Solutions

Expert Solution

a Annual Amortization resulting from the acquisition date fair value allocation
Fair value paid for acquisition $495,000
Fair value of noncontrolling interest $55,000
Total fair value $550,000
Less: Book value $479,000
Excess of fair value over book value $71,000
Excess assigned to
Building $47,000 10 years
Patented Technology $24,000 6 years
Annual amortization (24000/6) $4,000
Annual depreciation (47000/10) $4,700
Total $8,700
b Intra-entity transfer are upstream as the subsidiary sold the inventory to Parent company
c Intra entity gross profit in inventory existed as of January 1, 2018
Transfer price $220,000
Cost $110,000
Gross Profit $110,000
Gross Margin 50%
Inventory on Jan 1, 2018 $54,000
Gross Profit (54000 x 50%) $27,000
d Intra entity gross profit in inventory existed as of December 31, 2018
Transfer price $245,000
Cost $147,000
Gross Profit $98,000
Gross Margin 40%
Inventory on Dec 31, 2018 $45,000
Gross Profit (45000 x 40%) $18,000
e Amounts make up the $119,970 Equity Earning of Brey account balancefor 2018
Brey's reported net income $133,000
Excess fair value amortization ($8,700)
Realized gross profit $27,000
Deferred gross profit ($18,000)
Adjusted subsidiary net income $133,300
Ownership 90%
Equity in earnings of Brey $119,970
f Net income attributable to the non controlling interest for 2018
Adjusted Subsidiary net income $133,300
Less: Parent share $119,970
Non controlling interest $13,330
g Amount make up the $634,410 Investment in Brey account balanceas of December 31, 2018
Investment in Brey (consideration transferred) $495,000
Net income of Brey
Reported 2016 $81,000
2017 $97,000
2018 $133,000
Total $311,000
Intra entity gross profit, 12/31/2018 ($18,000)
Adjusted net income 2016-2018 $293,000
Pitino's ownership 90% $263,700
Excess Amortization ($26,100) ($23,490)
Dividends declared by Brey
2016 $27,500
2017 $31,500
2018 $53,000
Total $112,000
Pitino's ownership 90% ($100,800)
Investment in Brey, 31/21/2018 $634,410
h Worksheet entry to eliminate Subsidiary's beginning owners' equity balance
Common Stock $286,000
Retained Earnings $312,000
Equity in earnings of Brey $133,300
Building $20,900
Patent $12,000
Dividend $53,000
Investment in Brey $634,410
Noncontrolling Interest $76,790

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