Question

Problem 5-27 (LO 5-1, 5-2, 5-3, 5-4, 5-5, 5-7)

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $513,000 in cash. The subsidiary's stockholders' equity accounts totaled $497,000 and the noncontrolling interest had a fair value of $57,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $51,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (five-year remaining life).

Brey reported net income from its own operations of $83,000 in 2016 and $99,000 in 2017. Brey declared dividends of $28,500 in 2016 and $32,500 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	88,000		$	210,000		$	44,000
2017		161,000			230,000			56,500
2018		127,500			255,000			55,000

At December 31, 2018, Pitino owes Brey $35,000 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	$	(900,000	)		$	(461,000	)
Cost of goods sold		534,000				228,000
Expenses		187,300				96,000
Equity in earnings of Brey		(105,255	)			0
Net income	$	(283,955	)		$	(137,000	)
Retained earnings, 1/1/18	$	(526,000	)		$	(316,000	)
Net income (above)		(283,955	)			(137,000	)
Dividends declared		148,000				55,000
Retained earnings, 12/31/18	$	(661,955	)		$	(398,000	)
Cash and receivables	$	165,000			$	117,000
Inventory		350,000				255,000
Investment in Brey		645,300				0
Land, buildings, and equipment (net)		983,000				347,000
Total assets	$	2,143,300			$	719,000
Liabilities	$	(871,345	)		$	(19,000	)
Common stock		(610,000	)			(302,000	)
Retained earnings, 12/31/18		(661,955	)			(398,000	)
Total liabilities and equity	$	(2,143,300	)		$	(719,000	)

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 $105,255 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 $645,300 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.

Answer 1

As per policy only first four questions will be answered

Part A

Consideration transferred ............................ $513,000

Noncontrolling interest fair value.............. .... 57,000

Subsidiary fair value at acquisition-date...... 570,000

Book value..................................................... (497,000)

Fair value in excess of book value .............. $73000

Annual Excess

Excess fair value assignments.........Life...... Amortizations

To building ........................................... 51000... 10 yrs.....$5100

To patented technology ...................... 22,000... 5 yrs. .....4400

Totals..................................................... -0-...................... $9500

Part B

The intra-entity transfers were upstream because Brey sold inventory to Pitino.

Part C

Gross profit on 2017 transfers (230000-161000).....$69000

Gross profit percentage ($69000 ÷ $230000) ................. 30%

Inventory remaining, 12/31/17..................................... $56500

Gross profit percentage .................................................... 30%

Unrealized gross profit, January 1, 2017.... ................ $16950

Part D

Gross profit on 2018 transfers ($255,000 – $127500)..... $127500

Gross profit percentage ($127500 ÷ $255,000) ...............50%

Inventory remaining, 12/31/18.................................... $55000

Gross profit percentage ....................................................50%

Unrealized gross profit, December 31, 2018 ................ $27500