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Advanced Accounting Problem Assume that, on January 1, 2010, a parent company acquired an 80% interest in a subsidiary for $889,600 in cash. The total

Advanced Accounting Problem

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

1,446,600

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

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

Answer:

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

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