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Assume, on January 1, 2016, a parent company acquired an 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $456,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date. The parent assigned the excess to the following [A] assets:

[A] Asset	Initial Fair Value	Useful Life
Patent	$171,000	10 years
Goodwill	285,000	Indefinite
	$456,000

 

 

 

80% of the Goodwill is allocated to the parent. Assume the subsidiary 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 2021 and 2022:

	2021	2022
Transfer price for inventory sale	$475,000	$570,000
Cost of goods sold	(399,000)	(427,500)
Gross profit	$76,000	$142,500
% Inventory remaining	35%	25%
Gross profit deferred	$26,600	$35,625
EOY receivable/payable	$76,000	$133,000

 

 

 

The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsidiary report the following pre-consolidation financial statements at December 31, 2022: 

	Parent	Subsidiary			Parent	Subsidiary
Income statement:		Balance sheet:
Sales	$6,365,000	$2,375,000		Cash	$475,000	$380,000
Cost of goods sold	(4,275,000)	(1,425,000)		Accounts receivable	665,000	570,000
Gross profit	2,090,000	950,000		Inventory	855,000	760,000
Income (loss) from subsidiary	131,100			Equity investment	1,304,540
Operating expenses	(1,900,000)	(760,000)		Property, plant and equipment (PPE), net	3,800,000	950,000
Net income	$321,100	$190,000			$7,099,540	$2,660,000
Statement of retained earnings:
BOY retained earnings	$1,933,440	$893,000		Current liabilities	$760,000	$475,000
Net income	321,100	190,000		Long-term liabilities	2,850,000	855,000
Dividends	(190,000)	(38,000)		Common stock	475,000	95,000
EOY retained earnings	$2,064,540	$1,045,000		APIC	950,000	190,000
		Retained earnings	2,064,540	1,045,000
			$7,099,540	$2,660,000

 

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. (Complete for the first four years only.)

	Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2016	AAP	2017	AAP	2018	AAP	2019
	1/1/2016	Amortization	12/31/2016	Amortization	12/31/2017	Amortization	12/31/2018	Amortization
100%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
80%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
20%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer

 

b. Calculate and organize the profits and losses on intercompany transactions and balances.

	Downstream	Upstream
Intercompany profit on 1/1/22	Answer	Answer
Intercompany profit on 12/31/22	Answer	Answer

 

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the subsidiary.

Use a negative sign with your answer to indicate a reduction to net income.

Equity investment at 1/1/122:
80% x book value of the net assets of subsidiary	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
	Answer
Equity investment at 12/31/22:
80% x book value of the net assets of subsidiary	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
	Answer

 

d.  Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation.

Equity Investment
Equity Investment at 1/1/22	Answer	Answer
Net income	Answer	Answer	Dividends
AnswerNet incomeBOY upstream inventory profitsEOY upstream inventory profitsDividendsAAP amortization	Answer	Answer	AAP amortization
	Answer	Answer	AnswerNet incomeBOY upstream inventory profitsEOY upstream inventory profitsDividendsAAP amortization
Equity Investment at 12/31/22	Answer	Answer

e. Independently compute the owners' equity attributable to the noncontrolling interest beginning and ending balances starting with the owners' equity of the subsidiary.

Use a negative sign with your answer to indicate a reduction to net income.

Noncontrolling interest at 1/1/22:
20% of book value of the net assets of subsidiary	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
Less:	AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
	Answer
Noncontrolling interest at 12/31/22:
20% of book value of the net assets of subsidiary	Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
Less:	AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
	Answer

 

f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income.

Use a negative sign with your answer to indicate a reduction to net income.

Parent's stand-alone net income	Answer
Subsidiary's stand-alone net income	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Less: 100% AAP amortization	Answer
Consolidated net income	Answer
Parent's stand-alone net income	Answer
80% Subsidiary's stand-alone net income	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Less: 80% AAP amortization	Answer
Consolidated net income attributable to the controlling interest	Answer
20% of subsidiary's stand-alone net income	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits	Answer
Less: 20% AAP amortization	Answer
Consolidated net income attributable to the noncontrolling interest	Answer

 

g. Complete the consolidating entries according to the C-E-A-D-I sequence.

Consolidation Worksheet
Description	Debit	Credit
[C]	Equity income	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	Equity investment	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[A]	Patent	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	Equity investment	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[D]	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[Icogs]	Equity investment	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[Isales]	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[Icogs]	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
[Ipay]	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	Answer	Answer
	AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses	answer	answer