Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2019, in exchange for $486,000 in cash. The subsidiary's stockholders' equity accounts totaled $470,000, and the noncontrolling interest had a fair value of $54,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $45,000. 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 $80,000 in 2019 and $96,000 in 2020. Brey declared dividends of $27,000 in 2019 and $31,000 in 2020.
Brey sells inventory to Pitino as follows:
Year Cost to Brey Transfer Price to Pitino Inventory Remaining at Year-End (at transfer price)
2019 $ 85,000 $ 195,000 $ 41,000
2020 118,250 215,000 53,000
2021 156,000 240,000 40,000
At December 31, 2021, Pitino owes Brey $32,000 for inventory acquired during the period.
The following separate account balances are for these two companies for December 31, 2021, and the year then ended.
Note: Parentheses indicate a credit balance.
Pitino Brey
Sales revenues $ (894,000) $ (446,000)
Cost of goods sold 531,000 225,000
Expenses 187,000 90,000
Equity in earnings of Brey (117,090) 0
Net income $ (293,090) $ (131,000)
Retained earnings, 1/1/21 $ (520,000) $ (310,000)
Net income (above) (293,090) (131,000)
Dividends declared 145,000 52,000
Retained earnings, 12/31/21 $ (668,090) $ (389,000)
Cash and receivables $ 162,000 $ 114,000
Inventory 335,000 216,000
Investment in Brey 621,675 0
Land, buildings, and equipment (net) 980,000 344,000
Total assets $ 2,098,675 $ 674,000
Liabilities $ (835,585) $ (7,000)
Common stock (595,000) (278,000)
Retained earnings, 12/31/21 (668,090) (389,000)
Total liabilities and equity $ (2,098,675) $ (674,000)
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, 2021?
4. What intra-entity gross profit in inventory existed as of December 31, 2021?
5. What amounts make up the $117,090 Equity Earnings of Brey account balance for 2021?
6. What is the net income attributable to the noncontrolling interest for 2021?
7. What amounts make up the $621,675 Investment in Brey account balance as of December 31, 2021?
8. Prepare the 2021 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.