Question

Pitino acquired 80 percent of Brey's outstanding shares on January 1, 2016, in exchange for $369,000 in cash. The subsidiary's stockholders' equity accounts totaled $353,000 and the noncontrolling interest had a fair value of $92,250 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $19,000. 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 $67,000 in 2016 and $83,000 in 2017. Brey declared dividends of $18,000 in 2016 and $22,000 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	72,000		$	130,000		$	28,000
2017		97,500			150,000			40,500
2018		87,500			175,000			50,000

At December 31, 2018, Pitino owes Brey $19,000 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	$	(868,000	)		$	(381,000	)
Cost of goods sold		518,000				212,000
Expenses		185,700				64,000
Equity in earnings of Brey		(59,540	)			0
Net income	$	(223,840	)		$	(105,000	)
Retained earnings, 1/1/18	$	(494,000	)		$	(284,000	)
Net income (above)		(223,840	)			(105,000	)
Dividends declared		132,000				22,000
Retained earnings, 12/31/18	$	(585,840	)		$	(367,000	)
Cash and receivables	$	149,000			$	101,000
Inventory		270,000				151,000
Investment in Brey		456,000				0
Land, buildings, and equipment (net)		967,000				331,000
Total assets	$	1,842,000			$	583,000
Liabilities	$	(726,160	)		$	(37,000	)
Common stock		(530,000	)			(179,000	)
Retained earnings, 12/31/18		(585,840	)			(367,000	)
Total liabilities and equity	$	(1,842,000	)		$	(583,000	)

E. What amounts make up the $59,540 Equity Earnings of Brey account balance for 2018?

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

G. What amounts make up the $456,000 Investment in Brey account balance as of December 31, 2018?

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

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

Answer 1

369,000 92,250 Consideration transferred by Pitino for 80% share Fair value of Non controlling interest Fair value of Brey Less: Book value of Brey Excess of Fair value over book value 461,250 (353,000) 108,250 Useful Remaining Life [B] Initial Value TAL 19,000 89,250 108,250 Allocation of Excess Value to Specified Assets: Building Patented technology (108,250 - 19,000) Total 10 Amortization per year [A/B] 1,900 17,850 19,750 Unamortized value as on 01/01/18 Accumulated Amortization (Amortization per year x 2 years) Assets [B] Initial Value 01/01/16 [A] 19,000 89,250 108,250 Building Patented Technology Total 3,800 35,700 Value as on 01/01/18 [A-B] 15,200 53,550 68,750 39,500

Deferred Profit as on 01/01/18 Transfer price at year 2017 Less: Cost price Gross Profit Gross profit percentage (52,500 / 150,000) Inventory remaining at year end 2017 (at transfer price) Profit existed as of January 1, 2018 (40,500 x 35%) 150,000 (97,500) 52,500 35% 40,500 14,175 Intra-entity gross profit in inventory existed as of January 1, 2018 14,175 Deferred Profit as on 12/31/18 Transfer price at year 2018 Less: Cost price Gross Profit Gross profit percentage (87,500 / 175,000) 175,000 (87,500) 87,500 50% Inventory remaining at year end 2018 (at transfer price) Profit existed as on December 31, 2018 (50,000 x 50%) 50,000 25,000 Intra-entity gross profit in inventory existed as of December 31, 2018 25,000

e. Equity Earnings Net Income of Brey Add: Deferred intra entity inventory profit of 2017 realized in 2018 Less: Deferred Intra entity inventory profit urealized profit of 2018 Less: Amortization Expenses Adjusted Net Income of Brey 105,000 14,175 (25,000) (19,750) 74,425 Equity Earnings (74,425 x 80%) 59,540 Equity Earnings of Brey Account 59,540 f. Net Income attributable to Non Controlling Interest Adjusted Net Income of Brey 74,425 Net Income attributable to Non Controlling Interest (74,425 x 20%) 14,885

369,000 53,600 66,400 84,000 204,000 g. Investment in Brey Account Consideration transferred Add: Net Income of Brey 2016 (67,000 x 80%) 2017 (83,000 x 80%) 2018 (105,000 x 80%) Less: Dividend paid by Brey 2016 (18,000 x 80%) 2017 (22,000 x 80%) 2018 (22,000 x 80%) Less: Amortization expenses 2016 (19,750 x 80%) 2017 (19,750 x 80%) 2018 (19,750 x 80%) Less: Deferred Intra entity inventory profit 2018 (25,000 X 80%) Equity Investment In Brey Account 14,400 17,600 17,600 (49,600) 15,800 15,800 15,800 (47,400) (20,000) 456,000 General Journal Credit Common Stock 179,000 284,000 Retained Earnings - 01/01/2018 Investment in Brey (179,000 + 284,000) x 80% Non Controlling Interest (179,000 + 284,000) x 20% 370,400 92,600

Pitino Noncontrolling Consolidated Interest Totals (1,074,000) 565,825 Sales revenue Cost of goods sold PITINO AND ITS SUBSIDIARY BREY'S Consolidated Worksheet For the Year Ended 12/31/18 Adjustment Entries Brey Debit Credit (868,000) (381,000) [TI] 175,000 212,000 (G] 25,000 175,000 [TI] 14,175 [*G] 185,700 64,000 [E] 19,750 (59,540) 59,540 (223,840) (105,000) 269,450 Expenses Equity in earnings of Brey (14,885) Separate Net Income Consolidated Net Income NI attributable to Noncontrolling Interest NI attributable to Controlling Interest Retained Earnings 1/1 Net Income (above) Dividends declared Retained Earnings 12/31 284,000 (494,000) (223,840)| 132,000 (585,840) (284,000) [S] (105,000) 22,000 (367,000) (238,725) 14,885 (223,840) (494,000) (223,840) 132,000 (585,840) 17,600 [D] 4,400 Cash and Receivables Inventory Investment in Brey 149,000 270,000 456,000 101,000 151,000 231,000 396,000 [*G] [D] 11,340 17,600 19,000 [P] 25,000 [G] 59,5400 370,400 [S] 55,000 (A) 1,900 [E] 17,850 [E] 967,000 331,000 Land, buildings and equipment (net) Patented technology Total Assets (A) [A] 15,200 53,550 1,311,300 35,700 1,974,000 1,842,000 583,000

Liabilities Common stock Retained Earnings 12/31 Noncontrolling Interest 1/1 (726,160) (530,000) (585,840) 19,000 179,000 (37,000) [P] (179,000) [S] (367,000) [*G] (744,160) (530,000) (585,840) 2,835 92,600 [S] 13,750 [A] (103,515) (114,000) Noncontrolling Interest 12/31 Total Liabilities and Equity (114,000) (1,974,000) (1,842,000) (583,000) 861,815 861,815 Notes: [TI] is to eliminate the intercompany sale during the year 2018 [*G] is to eliminate the deferred profit on intercompany inventory transferred as on 01/01/18. Deferred Profit as on 01/01/18 14,175 Share of Pitino (14,175 x 80%) 11,340 Non-controlling Interest share (14,175 x 20%) 2,835 [G] is to eliminate the deferrd profit on intercompany inventory transferred as on 12/31/18. [S] is to eliminate the stockholdings of subsidiary and creating noncontrolling interest (D) is to eliminate the intercompany dividend declared by Brey to Controlling and Noncontrolling at 80:20 ratio. [E] is to record the amortization expenses of the excess value [A] is to record the carrying value as on 01/01/18 of excess value of assets Total Value of Unamortized assets as on 1/1/18 68,750 Share of Pitino (68,750 x 80%) 55,000 Non-controlling Interest share (13,750 x 20%) 13,750