Question

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $423,000 in cash. The subsidiary's stockholders' equity accounts totaled $407,000 and the noncontrolling interest had a fair value of $47,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $31,000. 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 $73,000 in 2016 and $89,000 in 2017. Brey declared dividends of $23,500 in 2016 and $27,500 in 2017.

Year	Cost to Brey			Transfer Price to Pitino			Inventory Remaining at Year-End (at transfer price)
2016	$	78,000		$	160,000		$	34,000
2017		90,000			180,000			46,500
2018		123,000			205,000			40,000

At December 31, 2018, Pitino owes Brey $25,000 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	$	(880,000	)		$	(411,000	)
Cost of goods sold		524,000				218,000
Expenses		186,300				76,000
Equity in earnings of Brey		(101,835	)			0
Net income	$	(271,535	)		$	(117,000	)
Retained earnings, 1/1/18	$	(506,000	)		$	(296,000	)
Net income (above)		(271,535	)			(117,000	)
Dividends declared		138,000				28,000
Retained earnings, 12/31/18	$	(639,535	)		$	(385,000	)
Cash and receivables	$	155,000			$	107,000
Inventory		300,000				181,000
Investment in Brey		558,630				0
Land, buildings, and equipment (net)		973,000				337,000
Total assets	$	1,986,630			$	625,000
Liabilities	$	(787,095	)		$	(18,000	)
Common stock		(560,000	)			(222,000	)
Retained earnings, 12/31/18		(639,535	)			(385,000	)
Total liabilities and equity	$	(1,986,630	)		$	(625,000	)

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 $101,835 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 $558,630 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

Dear Student,

As per the HOMEWORKLIB POLICY, only the first question should be answered. Kindly take note of it.

Part A

Consideration transferred	423000
Noncontrolling interest fair value	47000
Subsidiary fair value at acquisition-date	470000
Book value	(407000)
Fair value in excess of book value	63000
Excess fair value assignments		Life	Annual Excess Amortizations
To Building	31000	10 yrs	3100
To Patented technology	32000	4 yrs	8000
Totals			11100

Therefore,

Annual amortizations resulting from the acquisition-date-fair value allocations = $11100

Part B

Transfers are Upstream as Brey sold inventory to Pitino.

Part C

Gross profit on 2017 transfers ($180000-90000)	90000
Gross profit percentage (90000/180000)	50%
Inventory remaining, 12/31/17	46500
Gross profit percentage	50%
Unrealized gross profit, January 1, 2018	$23250

Part D

Gross profit on 2018 transfers ($205000-123000)	82000
Gross profit percentage (82000/205000)	40%
Inventory remaining, 12/31/18	40000
Gross profit percentage	40%
Unrealized gross profit, December 31, 2018	$16000