55. Consolidation subsequent to date of acquisition Equity method with noncontrolling interest, AAP, and upstream intercompany inventory sale Assume, on January 1, 2016, a parent company acquired an 85% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $500,000 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 Property, plant and equipment (PPE), net ................... Patent... $240,000 260,000 12 years 10 years $500,000 This acquisition resulted in no recognized goodwill. Assume 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 for the years ending 2018 and 2019: 2018 2019 Transfer price for inventory sale. .............. Cost of goods sold ... Gross profit.............. % Inventory remaining ...... Gross profit deferred. ....... EOY receivable/payable...... $300,000 (220,000) $ 80,000 25% $ 20,000 $350,000 (230,000) $120,000 35% $ 42,000 $120,000 $105,000 The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsid- iary report the following pre-consolidation financial statements at December 31, 2019: Parent Subsidiary Parent Subsidiary Income statement: Sales..................... $ $1,500,000 (1,000,000) 60,000 300,000 400,000 Balance sheet: Cash.... Accounts receivable.... Inventory.......... Equity investment... Property, plant and equipment, net...... $6,000,000 (4,000,000) 2,000,000 112,200 (1,200,000) $ 912,200 Cost of goods sold ........... Gross profit. ............... Income (loss) from subsidiary ... Operating expenses . ........ Net income . . . . . . . . . . . . . ... 500,000 $ 400,000 550,000 850,000 1,176,400 4,000,000 $6,976,400 (300,000) $ 200,000 850,000 $1,610,000 Statement of retained earnings: Beginning retained earnings... $2,014,200 Net income..... 912,200 Dividends ......... (250,000) Ending retained earnings ...... $2,676,400 ........ $ 630,000 200,000 (20,000) $ 810,000 Current liabilities. ...... Long-term liabilities. ....... Common stock .......... Additional paid-in capital. ...... Retained earnings ................ $ 700,000 2,000,000 600,000 1,000,000 2,676,400 $ 100,000 400,000 100,000 200,000 810,000 $1,610,000 $6,976,400 a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. Calculate and organize the profits and losses on intercompany transactions and balances. C. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the subsidiary. d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation. e. Independently compute the owners' equity attributable to the noncontrolling interest beginning and ending balances starting with the owners' equity of the subsidiary. f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet. 55. Consolidation subsequent to date of acquisition Equity method with noncontrolling interest, AAP, and upstream intercompany inventory sale Assume, on January 1, 2016, a parent company acquired an 85% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $500,000 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 Property, plant and equipment (PPE), net ................... Patent... $240,000 260,000 12 years 10 years $500,000 This acquisition resulted in no recognized goodwill. Assume 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 for the years ending 2018 and 2019: 2018 2019 Transfer price for inventory sale. .............. Cost of goods sold ... Gross profit.............. % Inventory remaining ...... Gross profit deferred. ....... EOY receivable/payable...... $300,000 (220,000) $ 80,000 25% $ 20,000 $350,000 (230,000) $120,000 35% $ 42,000 $120,000 $105,000 The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsid- iary report the following pre-consolidation financial statements at December 31, 2019: Parent Subsidiary Parent Subsidiary Income statement: Sales..................... $ $1,500,000 (1,000,000) 60,000 300,000 400,000 Balance sheet: Cash.... Accounts receivable.... Inventory.......... Equity investment... Property, plant and equipment, net...... $6,000,000 (4,000,000) 2,000,000 112,200 (1,200,000) $ 912,200 Cost of goods sold ........... Gross profit. ............... Income (loss) from subsidiary ... Operating expenses . ........ Net income . . . . . . . . . . . . . ... 500,000 $ 400,000 550,000 850,000 1,176,400 4,000,000 $6,976,400 (300,000) $ 200,000 850,000 $1,610,000 Statement of retained earnings: Beginning retained earnings... $2,014,200 Net income..... 912,200 Dividends ......... (250,000) Ending retained earnings ...... $2,676,400 ........ $ 630,000 200,000 (20,000) $ 810,000 Current liabilities. ...... Long-term liabilities. ....... Common stock .......... Additional paid-in capital. ...... Retained earnings ................ $ 700,000 2,000,000 600,000 1,000,000 2,676,400 $ 100,000 400,000 100,000 200,000 810,000 $1,610,000 $6,976,400 a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. Calculate and organize the profits and losses on intercompany transactions and balances. C. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the subsidiary. d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation. e. Independently compute the owners' equity attributable to the noncontrolling interest beginning and ending balances starting with the owners' equity of the subsidiary. f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet