Pitino acquired 90 percent of Brey’s outstanding shares on January 1, 2013, in e
ID: 2474616 • Letter: P
Question
Pitino acquired 90 percent of Brey’s outstanding shares on January 1, 2013, in exchange for $459,000 in cash. The subsidiary’s stockholders’ equity accounts totaled $443,000 and the noncontrolling interest had a fair value of $51,000 on that day. However, a building (with a ten-year remaining life) in Brey’s accounting records was undervalued by $39,000. 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 $77,000 in 2013 and $93,000 in 2014. Brey declared dividends of $25,500 in 2013 and $29,500 in 2014.
Brey sells inventory to Pitino as follows:
Year
Cost to Brey
Transfer Price
to Pitino
Inventory Remaining
at Year-End
(at transfer price)
2013
$
82,000
$
180,000
$
38,000
2014
100,000
200,000
50,500
2015
123,750
225,000
60,000
At December 31, 2015, Pitino owes Brey $29,000 for inventory acquired during the period.
The following separate account balances are for these two companies for December 31, 2015, and the year then ended. Note: Parentheses indicate a credit balance.
Pitino
Brey
Sales revenues
$
(888,000
)
$
(431,000
)
Cost of goods sold
528,000
222,000
Expenses
186,700
84,000
Equity in earnings of Brey
(101,115
)
0
Net income
$
(274,415
)
$
(125,000
)
Retained earnings, 1/1/15
$
(514,000
)
$
(304,000
)
Net income (above)
(274,415
)
(125,000
)
Dividends declared
142,000
32,000
Retained earnings, 12/31/15
$
(646,415
)
$
(397,000
)
Cash and receivables
$
159,000
$
111,000
Inventory
320,000
201,000
Investment in Brey
592,470
0
Land, buildings, and equipment (net)
977,000
360,000
Total assets
$
2,048,470
$
672,000
Liabilities
$
(822,055
)
$
(21,000
)
Common stock
(580,000
)
(254,000
)
Retained earnings, 12/31/15
(646,415
)
(397,000
)
Total liabilities and equity
$
(2,048,470
)
$
(672,000
)
a.
What was the annual amortization resulting from the acquisition-date fair-value allocations?
b.
Were the intra-entity transfers upstream or downstream?
Downstream
Upstream
c.
What unrealized gross profit existed as of January 1, 2015?
d.
What unrealized gross profit existed as of December 31, 2015?
Pitino acquired 90 percent of Brey’s outstanding shares on January 1, 2013, in exchange for $459,000 in cash. The subsidiary’s stockholders’ equity accounts totaled $443,000 and the noncontrolling interest had a fair value of $51,000 on that day. However, a building (with a ten-year remaining life) in Brey’s accounting records was undervalued by $39,000. Pitino assigned the rest of the excess fair value over book value to Brey’s patented technology (four-year remaining life).
Explanation / Answer
Ans 1 Purchase considerations 4,59,000 90% of Net Worth of aquiree 443000-51000 392000 Excess 67,000 Allocated to Building 39000 Allocated to Patent 28,000 Amortisation of building -Excess value 3900 Amortisation of Patent -Excess value 7000 Ans 2 Upstream