Question
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
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.
- 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.
- Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary.
- Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the year of consolidation.
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