Question

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $540,000 in cash. The subsidiary's stockholders' equity accounts totaled $524,000 and the noncontrolling interest had a fair value of $60,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $32,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (four-year remaining life).

Brey reported net income from its own operations of $86,000 in 2016 and $102,000 in 2017. Brey declared dividends of $30,000 in 2016 and $34,000 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	91,000		$	225,000		$	47,000
2017		122,500			245,000			59,500
2018		135,000			270,000			50,000

At December 31, 2018, Pitino owes Brey $38,000 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	$	(906,000	)		$	(476,000	)
Cost of goods sold		537,000				231,000
Expenses		187,600				102,000
Equity in earnings of Brey		(120,195	)			0
Net income	$	(301,595	)		$	(143,000	)
Retained earnings, 1/1/18	$	(532,000	)		$	(322,000	)
Net income (above)		(301,595	)			(143,000	)
Dividends declared		151,000				58,000
Retained earnings, 12/31/18	$	(682,595	)		$	(407,000	)
Cash and receivables	$	168,000			$	120,000
Inventory		365,000				280,000
Investment in Brey		667,260				0
Land, buildings, and equipment (net)		986,000				350,000
Total assets	$	2,186,260			$	750,000
Liabilities	$	(878,665	)		$	(17,000	)
Common stock		(625,000	)			(326,000	)
Retained earnings, 12/31/18		(682,595	)			(407,000	)
Total liabilities and equity	$	(2,186,260	)		$	(750,000	)

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 $120,195 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 $667,260 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.

Answer 1

Sales	1112000	(906000+476000-270000)
COGS	493250	(537000+231000-270000-29750+25000)
Expenses	303800	(187600+102000+14200)
Investment	0	(intra-entity balance is eliminated to include individual revenue and expense accounts of the subsidiary)
NCI	13355
Consolidated net income to parent	301595	(1112000-493250-303800-13355)
r/e	532000
dividends paid	151000
r/e 31/12	682595
cash	250000	(168000+120000-38000)
inventory	620000	(365000+280000-25000)
investment	0
land buildings	1362400	(988000+352000+22400)
patented technology	11000
total assets	2243400
liabilities	857665	(878665+17000-38000)
NCI 12/31	78140
Common stock	625000
retained earnings 12/31	682595
total liabilities & stockholders equity	2243400

workings:

a.
consideration transferred	540000
Non controlling interest fair value	60000
subsidiary fair value at acquisition date	600000
book value	-524000
fair value in excess of book value	76000
Excess fair value assignments		Years	Annual amortization
building	32000	10 years	3200
patented technology	44000	4 years	11000
totals	0		14200
gross profit on 2017 transfers	122500		gross profit on 2018 transfers	135000
(245000-122500)			(270000-135000)
gross profit percentage	50%		gross profit percentage	50%
Inventory remaining 2017 transfers	59500		Inventory remaining 2018 transfers	50000
gross profit	50%		gross profit	50%
unrealised gross profit jan 1 2018	29750		unrealised gross profit dec 31 2018	25000
Brey's reported net income	143000
Excess fair value amortization	-14200
Realised gross profit	29750
Deferred gross profit	-25000
Addjusted subsidiary income	133550
ownership	90%
investment income-brey	120195
NCI -Subsidiary's income	13355
Investment In brey		540000
Net income of brey
2016	86000
2017	102000
2018	143000
	331000
Unrealised gross profit	-25000
Realised income 2016-2018	306000
petinos ownership	90%	275400
Exccess amortization
(10600*3 years*90%)		-38340
Dividends paid by brey
2016	30000
2017	34000
2018	58000
	122000
petinos ownership	90%	-109800
Investment In brey 31/12/2018		667260
Part h)
common stock(brey)	326000
retained earnings 1/1/18(brey)	292250
(reduced by unrealised gorss profit)
investment in brey (90%)		556425
Noncontrolling interest in brey(10%)		61825