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