Allison Corporation acquired 90 percent of Bretton on January 1, 2016. Of Bretto
ID: 2583688 • Letter: A
Question
Allison Corporation acquired 90 percent of Bretton on January 1, 2016. Of Bretton's total acquisition-date fair value, $60,000 was allocated to undervalued equipment (with a 10-year remaining life) and $80,000 was attributed to franchises (to be written off over a 20-year period). Since the takeover, Bretton has transferred inventory to its parent as follows Transfer Price Remaining at Year-End Year Cost 2016 $45,000 $ 90,000 30,000 (at transfer price) 2017 48,000 80,000 2018 69,000 92,000 35,000 (at transfer price) 50,000 (at transfer price) On January 1, 2017, Allison sold Bretton a building for $50,000 that had originally cost $70,000 but had only a $30,000 book value at the date of transfer. The building is estimated to have a five-year remaining life (straight-line depreciation is used with no salvage value). Selected figures from the December 31, 2018, trial balances of these two companies are as follows Bretton Sales Cost of goods sold Operating expenses Investment income Inventory Equipment (net) Buildings (net) 700,000 400,000 440,000 120,000 220,000 80,000 Not given 210,000 140,000 350,000 90,000 110,000 190,000 Determine consolidated totals for each of these account balancesExplanation / Answer
Solution:
Excess amortization expenses
Equipment $60,000 ÷ 10years =$6,000per year
Franchises $80,000 ÷ 20years =$4,000per year
Annual excess amortizations $10,000
Intra-entity Gross Proft—Inventory, 1/1/18:
Gross proft ($80,000 – $48,000) $32,000
Gross proft rate ($32,000 ÷ $80,000) 40%
Remaining inventory $35,000
Gross proft rate 40%
Intra-entity gross proft in beginning inventory,1/1/18 $14,000
Intra-entity Gross Proft—Inventory, 12/31/18:
Gross proft ($92,000 – $69,000) $23,000
Gross proft rate ($23,000 ÷ $92,000) 25%
Remaining inventory $50,000
Gross proft rate 25%
Intra-entity gross proft in ending inventory,12/31/18 $12,500
Impact of Intra-Entity building transfer:
12/31/17—Transfer price fguresTransfer price 50,000
Gain on transfer ($50,000 – $30,000)20,000
Depreciation expense ($50,000 ÷ 5 years)10,000
Accumulated depreciation10,000
12/31/18—Transfer price Fgures
Depreciation expense10,000
Accumulated depreciation20,000
12/31/17—Historical cost Figures
Historical cost$70,000
Depreciation expense ($30,000 book value÷ 5 years)6,000
Accumulated depreciation ($40,000 +$6,000)46,000
12/31/18—Historical cost Figures
Depreciation expense6,000
Accumulated depreciation52,000
Consolidated Balances
?Sales = $1,008,000 (add the two book values and subtract $92,000 inintra-entity transfers)
?Cost of Goods Sold = $566,500 (add the two book values and subtract$92,000 in intra-entity purchases. Subtract $14,000 because of theprevious year deferred intra-entity gross proFt and add $12,500 todefer the current year intra-entity gross proFt in ending inventory.)
?Operating Expenses = $206,000 (add the two book values and includethe $10,000 excess amortization expenses but remove the $4,000 inexcess depreciation expense [$10,000 – $6,000] created by buildingtransfer)
?Investment Income = $0 (the intra-entity balance is removed becausethe individual revenue and expense accounts of the subsidiary areincluded for consolidation
Inventory = $287,500 (add the two book values and subtract the$12,500 ending intra-entity gross proft)
?Equipment (net) = $292,000 (add the two book values and include the$60,000 allocation From the acquisition-date Fair value less three yearsoF excess amortizations)
?Buildings (net) = $528,000 (add the two book values and subtract the$20,000 intra-entity gain on the transFer aFter two years oF excessdepreciation [$4,000 per year])
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