In: Accounting
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 | ) | |
What was the annual amortization resulting from the acquisition-date fair-value allocations?
Were the intra-entity transfers upstream or downstream?
What intra-entity gross profit in inventory existed as of January 1, 2018?
What intra-entity gross profit in inventory existed as of December 31, 2018?
What amounts make up the $119,970 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 $634,410 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.
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 |