Question
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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