Pitino aoquired 90 percent of Brey\'s outstanding shares on January 1, 2013, in
ID: 2553268 • Letter: P
Question
Pitino aoquired 90 percent of Brey's outstanding shares on January 1, 2013, in exchange for $567,000 in cash. The subsidiary's stockholders' equity accounts totaled $551,000 and the noncontrolling interest had a fair value of $63,000 on that day. However, a building (with a ten-year remaining life) in Brey's accounting records was undervalued by $38,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (five-year remaining life) dn Brey reported net income from ts own operations of $89,000 in 2013 and $105,00 in 2014. Brey declared dividends of $31,500 in 2013 and $35,500 in 2014 Brey sells inventory to Pitino as follows: Year 2013 2014 2015 Cost to Brey 94,000 143,000 171,000 Transfer Price to Pitino $240,000 260,000 285,000 at Year-End at transfer price) $ 50,000 62,000 65,000 At December 31, 2015, Pitino owes Brey $41,000 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 Sales revenues Cost of goods sold Expenses Equity in earnings of Brey $ (912,000) $(491,000) 234,000 108,000 0 540,000 187,900 (125,010) Net income (309,110) $(149,000) Retained earnings, 1/1/15 Net income (above) Dividends declared $(538,000) $(328,000) (309,110) (149,000 61,000 154,000 Retained earnings, 12/31/15 S (693,110) $(416,000) Cash and receivables Inventory Investment in Brey Land, buildings, and equipment (net) S 171,000 $123,000 310,000 0 353,000 380,000 704,700 989,000 Total assets $2,244,700 $ 786,000 Liabilities Common stock Retained earnings, 12/31/15 $ (911,590) $(20,000) (640,000) (350,000) (693,110) (416,000) Total liabilities and equity $(2,244,700) $(786,000)Explanation / Answer
a) Annual Ammortization
Value of the equity of subsidiary on the day of aqcuisition $551000
Add: undervalued Asset ( $38000*90%) $34200
Total value of assets aqcuired $585200
Less: Amount paid ($567000)
Bargain Purchase $18200
Annual ammortization would be -
c) Unrealized Gross profit as on Jan 1St 2015
Inventory at year end 2014 $62000
Unrealised profits included in Inventory=(117000/260000)*62000= $27900, of which 90% ie $25110 is Pitino's portion and the balance belongs to non controlling interest.
d) Unrealised profits as on 31st Dec 2015
Closing Inventory at transfer Price $65000
Transfer Price of entire inventory $285000
Less: Cost to Brey ($171000)
profits $114000
Proportionate unrealised profits included in closing Inventory = 114000/285000*65000= $26000, of which 90% ie $23400 is Pitino's portion and the remaining belongs to non controlling interest.