Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2019, in exchange for $342,000 in cash. The subsidiary's stockholders' equity accounts totaled $326,000, and the noncontrolling interest had a fair value of $38,000 on that day. However, a building (with a nine-year remaining life) in Brey's accounting records was undervalued by $18,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (six-year remaining life).   Brey reported net income from its own operations of $64,000 in 2019 and $80,000 in 2020. Brey declared dividends of $19,000 in 2019 and $23,000 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 $ 69,000   $ 115,000   $ 25,000   2020   81,000     135,000     37,500   2021   92,800     160,000     50,000       At December 31, 2021, Pitino owes Brey $16,000 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 $ (862,000 )   $ (366,000 ) Cost of goods sold   515,000       209,000   Expenses   185,400       67,000   Equity in earnings of Brey   (68,400 )     0   Net income $ (230,000 )   $ (90,000 ) Retained earnings, 1/1/21 $ (488,000 )   $ (278,000 ) Net income (above)   (230,000 )     (90,000 ) Dividends declared   136,000       27,000   Retained earnings, 12/31/21 $ (582,000 )   $ (341,000 ) Cash and receivables $ 146,000     $ 98,000   Inventory   255,000       136,000   Investment in Brey   450,000       0   Land, buildings, and equipment (net)   964,000       328,000   Total assets $ 1,815,000     $ 562,000   Liabilities $ (718,000 )   $ (71,000 ) Common stock   (515,000 )     (150,000 ) Retained earnings, 12/31/21   (582,000 )     (341,000 ) Total liabilities and equities $ (1,815,000 )   $ (562,000 )     What was the annual amortization resulting from the acquisition-date fair-value allocations? Were the intra-entity transfers upstream or downstream? What intra-entity gross profit in inventory existed as of January 1, 2021?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2019, in exchange for $342,000 in cash. The subsidiary's stockholders' equity accounts totaled $326,000, and the noncontrolling interest had a fair value of $38,000 on that day. However, a building (with a nine-year remaining life) in Brey's accounting records was undervalued by $18,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (six-year remaining life).

 

Brey reported net income from its own operations of $64,000 in 2019 and $80,000 in 2020. Brey declared dividends of $19,000 in 2019 and $23,000 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 $ 69,000   $ 115,000   $ 25,000  
2020   81,000     135,000     37,500  
2021   92,800     160,000     50,000  
 

 

At December 31, 2021, Pitino owes Brey $16,000 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 $ (862,000 )   $ (366,000 )
Cost of goods sold   515,000       209,000  
Expenses   185,400       67,000  
Equity in earnings of Brey   (68,400 )     0  
Net income $ (230,000 )   $ (90,000 )
Retained earnings, 1/1/21 $ (488,000 )   $ (278,000 )
Net income (above)   (230,000 )     (90,000 )
Dividends declared   136,000       27,000  
Retained earnings, 12/31/21 $ (582,000 )   $ (341,000 )
Cash and receivables $ 146,000     $ 98,000  
Inventory   255,000       136,000  
Investment in Brey   450,000       0  
Land, buildings, and equipment (net)   964,000       328,000  
Total assets $ 1,815,000     $ 562,000  
Liabilities $ (718,000 )   $ (71,000 )
Common stock   (515,000 )     (150,000 )
Retained earnings, 12/31/21   (582,000 )     (341,000 )
Total liabilities and equities $ (1,815,000 )   $ (562,000 )
 

 

  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?

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