A parent company acquired its 70% interest in its subsidiary on January 1, 2017. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $280,000 in excess of the book value of the subsidiarys Stockholders Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiarys financial statements (i.e., there is no Goodwill).

The Royalty Agreement has a 7-year estimated remaining economic life on the acquisition date. Both companies use straight line amortization, with no terminal value.

In January 2020, the subsidiary sold Equipment to the parent for a cash price of $200,000. The subsidiary acquired the equipment at a cost of $384,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 6 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 4-year useful life.

Following are pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2022. The parent uses the equity method to account for its Equity Investment.

1. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP.
2. Calculate and organize the profits and losses on intercompany transactions and balances.
3. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary.
4. Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the year of consolidation.
5. Independently compute the owners equity attributable to the noncontrolling interest beginning and ending balances starting with the owners equity of the subsidiary.
6. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income.
7. Prepare the C, E, A, D, and I entries and post them to the worksheet.

\begin{tabular}{|c|c|c|c|c|c|} \hline & Parent & Subsidiary & & Parent & Subsidiary \\ \hline Income statement: & & & Balance sheet: & & \multirow[b]{2}{*}{$200,000} \\ \hline Sales........... & $2,720,000 & $720,000 & Cash........ & 495,600 & \\ \hline Cost of goods sold. & (1,920,000) & (400,000) & Accounts receivable. & 424,000 & 336,000 \\ \hline Gross profit........... & 800,000 & 320,000 & Inventory. ...... & \begin{tabular}{r} 720,000 \\ 2,800,000 \end{tabular} & \begin{tabular}{l} 440,000 \\ 800,000 \end{tabular} \\ \hline Income (loss) from subsidiary & \multirow{2}{*}{\begin{tabular}{r} 64,120 \\ (417,600) \\ \end{tabular}} & \multirow{2}{*}{\begin{tabular}{r} 0 \\ (200,000) \end{tabular}} & & & \\ \hline Operating expenses. & & & Total assets. . & $4,778,680 & \multirow[t]{2}{*}{$1,776,000} \\ \hline Net income . & $446,520 & $120,000 & Totar asoets. & 44,170,000 & \\ \hline \multicolumn{6}{|l|}{ Statement of retained earnings: } \\ \hline Beginning retained earnings. & \begin{tabular}{r} $1,420,160 \\ 446,520 \end{tabular} & \begin{tabular}{r} $160,000 \\ 120,000 \end{tabular} & \begin{tabular}{l} Accounts payable.... \\ Other current liabilities \end{tabular} & \begin{tabular}{rl} $ & 272,000 \\ 320,000 \end{tabular} & \begin{aligned}\( \$ 200,000 \\ 240,000\end{aligned} \) \\ \hline \begin{tabular}{l} Net income.. \\ Dividends declared. . . . . . \end{tabular} & \begin{tabular}{l} 446,520 \\ (80,000) \end{tabular} & (24,000) & Long-term liabilities .. & 1,200,000 & 880,000 \\ \hline \multirow{4}{*}{ Ending retained earnings. } & $1,786,680 & $256,000 & Common stock.... & 160,000 & 80,000 \\ \hline & & & Additional paid-in capital. & 1,040,000 & 120,000 \\ \hline & & & Retained earnings & 1,786,680 & 256,000 \\ \hline & & & Total liabilities and equity . . & $4,778,680 & $1,776,000 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline & Parent & Subsidiary & & Parent & Subsidiary \\ \hline Income statement: & & & Balance sheet: & & \multirow[b]{2}{*}{$200,000} \\ \hline Sales........... & $2,720,000 & $720,000 & Cash........ & 495,600 & \\ \hline Cost of goods sold. & (1,920,000) & (400,000) & Accounts receivable. & 424,000 & 336,000 \\ \hline Gross profit........... & 800,000 & 320,000 & Inventory. ...... & \begin{tabular}{r} 720,000 \\ 2,800,000 \end{tabular} & \begin{tabular}{l} 440,000 \\ 800,000 \end{tabular} \\ \hline Income (loss) from subsidiary & \multirow{2}{*}{\begin{tabular}{r} 64,120 \\ (417,600) \\ \end{tabular}} & \multirow{2}{*}{\begin{tabular}{r} 0 \\ (200,000) \end{tabular}} & & & \\ \hline Operating expenses. & & & Total assets. . & $4,778,680 & \multirow[t]{2}{*}{$1,776,000} \\ \hline Net income . & $446,520 & $120,000 & Totar asoets. & 44,170,000 & \\ \hline \multicolumn{6}{|l|}{ Statement of retained earnings: } \\ \hline Beginning retained earnings. & \begin{tabular}{r} $1,420,160 \\ 446,520 \end{tabular} & \begin{tabular}{r} $160,000 \\ 120,000 \end{tabular} & \begin{tabular}{l} Accounts payable.... \\ Other current liabilities \end{tabular} & \begin{tabular}{rl} $ & 272,000 \\ 320,000 \end{tabular} & \begin{aligned}\( \$ 200,000 \\ 240,000\end{aligned} \) \\ \hline \begin{tabular}{l} Net income.. \\ Dividends declared. . . . . . \end{tabular} & \begin{tabular}{l} 446,520 \\ (80,000) \end{tabular} & (24,000) & Long-term liabilities .. & 1,200,000 & 880,000 \\ \hline \multirow{4}{*}{ Ending retained earnings. } & $1,786,680 & $256,000 & Common stock.... & 160,000 & 80,000 \\ \hline & & & Additional paid-in capital. & 1,040,000 & 120,000 \\ \hline & & & Retained earnings & 1,786,680 & 256,000 \\ \hline & & & Total liabilities and equity . . & $4,778,680 & $1,776,000 \\ \hline \end{tabular}