4. Topic- Consolidation subsequent to date of acquisitionCost method with non-controlling interest, AAP, and upstream intercompany inventory sale

LO 3: 35 Points

Assume that, on January 1, 2010, a parent company acquired an 80% interest in a subsidiary for

$889,600 in cash. The total fair value of the controlling and non-controlling interests on the acquisition

date was $1,112,000 which is $440,000 over the book value of the subsidiarys Stockholders Equity

on the acquisition date. The parent assigned the excess to the following [A] assets:

[A]Asset	Initial Fair Value	Useful Life
Patent	160,000	10 years
Goodwill	280,000
440,000

On the acquisition date, the retained earnings of the subsidiary were $400,000. The acquisition-date Good-

will is allocated to the parent and subsidiary in an 80:20 proportion, respectively. Assume that the subsid-

iary sells inventory to the parent (upstream) which includes that inventory in products that it ultimately sells

to customers outside of the controlled group. You have compiled the following data as of 2015 and 2016

2015	2016

Transfer price for inventory sale	480,000	560,000
Cost of goods sold.	(400,000)	(464,000)
Gross profit	80,000	96,000
% Inventory remaining	25%	35%
Gross profit deferred	20,000	33,600
EOY receivable/payable	56,000	96,000

The inventory not remaining at the end of the year has been sold outside of the controlled group. The

parent uses the cost method of pre-consolidation investment bookkeeping. The parent and the subsid-

iary report the following pre-consolidation financial statements at December 31, 2016:

	Parent	Subsidiary
Income Statement:
Sales	5,360,000	2,000,000
Cost of Goods sold	(3,600,000)	(1,200,000)
Gross profit	1,760,000	800,000
Income (loss) from subsidiary	25,600
Operating expenses	(1,600,000)	(640,000)
Net Income	185,600	160,000
Consolidated NI attrib to NCI
Consolidated NI attrib to CI
Statement of Ret Earnings:
BOY retained earnings	1,441,000	800,000
Net income	185,600	160,000
Dividends	(160,000)	(32,000)
EOY retained earnings	1,466,600	928,000
Balance Sheet:
Cash	480,000	320,000
Accounts receivable	640,000	480,000
Inventory	800,000	640,000
Equity investment	889,600
PPE, net	2,960,000	800,000
Patent
Goodwill
Current liabilities	703,000	400,000
Long-term liabilities	2,400,000	640,000
Common stock	400,000	112,000
APIC	800,000	160,000
Retained earnings	1,466,600	928,000
Noncontrolling interest
	5,769,600	2,240,000

Required:

• Compute the pre-consolidation Equity Investment account ending balances

assuming that the parent company used the equity method instead of the cost method. For each of

these computations, start with the stockholders equity of the subsidiary.

b. Compute the amount of the [ADJ] consolidating entry.

c. Independently compute the owners equity attributable to the noncontrolling interest

ending balances starting with the owners equity of the subsidiary.

d. Complete the consolidating entries according to the C-E-A-D-I sequence

a.	Equity Investment A/C at 12/31/16:
80% x book value of the net assets of subsidiary
Add: unamortized (80%) AAP
Less: 80% of upstream deferred intercompany profits

b.	Computation of [ADJ] amount
80% of change in RE(S) from acquisition date through BOY
Less: Cum 80% AAP amort. from acquisition date through BOY
Less: 80% of the BOY U-S unconf intercompany inventory profits
[ADJ] Amount
c.
Noncontrolling interest at 12/31/16:
20% of book value of the net assets of subsidiary
Add: 20% unamortized AAP
Less: 10% of upstream deferred intercompany profits

d.

e.	[ADJ]	Equity Investment
Retained earnings of Parent - BOY
[C]	Equity investment income
Consolidated Net Income attribute to noncontrolling interest
Dividends
Noncontrolling interest
[E]	Common stock (S)
APIC (S)
Retained earnings (S)
Equity investment
Noncontrolling interest
[A]	PPE, net
Patent
Equity investment
Noncontrolling interest
[D]	Operating expenses
Patent
[Icogs]	Equity Investment
Noncontrolling interest
Cost of Goods Sold
[Isales]	Sales
Cost of Goods Sold
[Icogs]	Cost of Goods Sold
Inventory
[Ipay]	Accounts Payable
Accounts Receivable

4. Topic- Consolidation subsequent to date of acquisitionCost method with non-controlling interest, AAP, and upstream intercompany inventory sale LO 3: 35 Points Assume that, on January 1, 2010, a parent company acquired an 80% interest in a subsidiary for $889,600 in cash. The total fair value of the controlling and non-controlling interests on the acquisition date was $1,112,000 which is $440,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date. The parent assigned the excess to the following [A] assets: [A]Asset Initial Fair Value Useful Life Patent Goodwill 160,000 280,000 440,000 10 years On the acquisition date, the retained earnings of the subsidiary were $400,000. The acquisition-date Goodwill is allocated to the parent and subsidiary in an 80:20 proportion, respectively. Assume that the subsidiary sells inventory to the parent (upstream) which includes that inventory in products that it ultimately sells to customers outside of the controlled group. You have compiled the following data as of 2015 and 2016 2015 Transfer price for inventory sale Cost of goods sold. Gross profit % Inventory remaining Gross profit deferred EOY receivable/payable 480,000 (400,000) 80,000 25% 20,000 56,000 2016 560,000 (464,000) 96,000 35% 33,600 96,000 The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the cost method of pre-consolidation investment bookkeeping. The parent and the subsidiary report the following pre-consolidation financial statements at December 31, 2016: Parent Income Statement: Sales Cost of Goods sold Gross profit Income (loss) from subsidiary Operating expenses Net Income Consolidated NI attrib to NCI Consolidated NI attrib to CI Subsidiary 5,360,000 (3,600,000) 2,000,000 (1,200,000) 1,760,000 25,600 800,000 (1,600,000) (640,000) 185,600 160,000 Required: a. Compute the pre-consolidation Equity Investment account ending balances assuming that the parent company used the equity method instead of the cost method. For each of these computations, start with the stockholders' equity of the subsidiary. b. Compute the amount of the [ADJ] consolidating entry. c. Independently compute the owners' equity attributable to the noncontrolling interest ending balances starting with the owners' equity of the subsidiary. d. Complete the consolidating entries according to the C-E-A-D-I sequence Statement of Ret Earnings: BOY retained 1,441,000 800,000 earnings Net income 185,600 160,000 Dividends (160,000) (32,000) EOY retained 1,466,600 928,000 a. Equity Investment A/C at 12/31/16: earnings 80% x book value of the net assets of subsidiary Add: unamortized (80%) AAP Balance Sheet: Less: 80% of upstream deferred intercompany profits Cash 480,000 320,000 Accounts 640,000 480,000 receivable b. Computation of [ADJ] amount Inventory 80%800,000 of change in RE(S)640,000 from acquisition date through BOY Equity Less:889,600 Cum 80% AAP amort. from acquisition date through BOY investment Less: 80% of the BOY U-S unconf intercompany inventory profits [ADJ] Amount PPE, netc. Patent Goodwill 2,960,000 800,000 Noncontrolling interest at 12/31/16: 20% of book value of the net assets of subsidiary Add: 20% unamortized AAP Less: 10% of upstream deferred intercompany profits Current 703,000 400,000 liabilities d. Long-term 2,400,000 640,000 e. [ADJ] Equity Investment liabilities earnings of Parent - BOY Common stock 400,000 Retained112,000 APIC 800,000 160,000 Retained 1,466,600 928,000 earnings Noncontrolling interest [C] Equity investment income Consolidated Net Income attribute to noncontrolling interest Dividends Noncontrolling interest [E] Common stock (S) APIC (S) Retained earnings (S) Equity investment Noncontrolling interest [A] PPE, net Patent Equity investment Noncontrolling interest [D] Operating expenses Patent [Icogs] Equity Investment Noncontrolling interest Cost of Goods Sold [Isales] Sales Cost of Goods Sold [Icogs] Cost of Goods Sold Inventory [Ipay] Accounts Payable Accounts Receivable