Allison Corporation acquired 90 percent of Bretton on January 1, 2016. Of Bretto
ID: 2581440 • 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 Cost Price Remaining at Year-End 2017 48,000 80,000 2018 69,000 92,000 2016 $45,000 $ 90,000 30,000 (at transfer price) 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)Explanation / 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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