Kellogg Company (Kellogg's) acquired 75 percent of the outstanding stock of Wholesome & Hearty Foods ("Wholesome") at the end of 2007, for cash and stock totaling \($120\) million. Wholesome's assets and liabilities were fairly reported at the date of acquisition, except for these items:

Wholesome's book value at the date of acquisition was \($74\) million, and the fair value of the 25% non-controlling interest was \($35\) million. It is now December 31, 2016 (the end of the ninth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2008-2015 is \($2\) million, and impairment in 2016 is \($1\) million. Wholesome sells merchandise and raw materials to Kellogg's at a markup of 30% on cost. Here is information on these intercompany sales (in thousands):

Below are the separate trial balances of Kellogg’s and Wholesome at December 31, 2016.

In your answers below, present all numbers in thousands.

Required

a. Calculate the initial goodwill arising from this acquisition, and its allocation to the controlling and noncontrolling interests.

b. Prepare a schedule computing Kellogg’s equity in net income of Wholesome and noncontrolling interest in net income for 2016.

c. Prepare a working paper to consolidate the trial balances of Kellogg’s and Wholesome at December 31, 2016. Label your eliminating entries (C), (1), (E), (R), (O), and (N).

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(in thousands) Plant & equipment, net (10-year life, straight-line). Veggie burger recipe (10-year life, straight-line). Long-term debt (4-year life, straight-line)... Book value $150,000 Fair value $135,000 0 25,000 30,000 34,000