Assume that, on January 1, 2010, a parent company acquired a 75% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $550,000 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 $200,000 10 years Goodwill 350,000 Indefinite $550,000 75% of the Goodwill is allocated to the parent. Assume that 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 2015 and 2016: 2015 2016 Transfer price for inventory sale $600,000 $700,000 Cost of goods sold (500,000) (580,000) Gross profit $100,000 $120,000 % Inventory remaining 25% 35% Gross profit deferred $25,000 $42,000 EOY receivable/payable $70,000 $120,000 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, 2016: Parent Subsidiary Parent Subsidiary Income statement: Balance sheet: Sales $6,700,000 $2,500,000 Cash $600,000 $400,000 Cost of goods sold (4,500,000) (1,500,000) Accounts receivable 800,000 600,000 Gross profit 2,200,000 1,000,000 Inventory 1,000,000 800,000 Income (loss) from subsidiary 122,250 Equity investment 1,401,000 Operating expenses (2,000,000) (800,000) Property, plant and equipment (PPE), net 3,700,000 1,000,000 Net income $322,250 $200,000 $7,501,000 $2,800,000 Statement of retained earnings: BOY retained earnings $2,000,000 $1,000,000 Current liabilities $878,750 $500,000 Net income 322,250 200,000 Long-term liabilities 3,000,000 800,000 Dividends (200,000) (40,000) Common stock 500,000 140,000 EOY retained earnings $2,122,250 $1,160,000 APIC 1,000,000 200,000 Retained earnings 2,122,250 1,160,000 $7,501,000 $2,800,000 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 2010 AAP 2011 AAP 2012 AAP 2013 1/1/2010 Amortization 12/31/2010 Amortization 12/31/2011 Amortization 12/31/2012 Amortization 100% Answer Answer 200,000 Answer 20,000 Answer 180,000 Answer 20,000 Answer 160,000 Answer 20,000 Answer 140,000 Answer 20,000 Goodwill Answer 350,000 Answer 0 Answer 350,000 Answer 0 Answer 350,000 Answer 0 Answer 350,000 Answer 0 Answer 550,000 Answer 20,000 Answer 530,000 Answer 20,000 Answer 510,000 Answer 20,000 Answer 490,000 Answer 20,000 75% Answer Answer 150,000 Answer 15,000 Answer 135,000 Answer 15,000 Answer 120,000 Answer 15,000 Answer 105,000 Answer 15,000 Goodwill Answer 262,500 Answer 0 Answer 262,500 Answer 0 Answer 262,500 Answer 0 Answer 262,500 Answer 0 Answer 412,500 Answer 15,000 Answer 397,500 Answer 15,000 Answer 382,500 Answer 15,000 Answer 367,500 Answer 15,000 25% Answer Answer 50,000 Answer 5,000 Answer 45,000 Answer 5,000 Answer 40,000 Answer 5,000 Answer 35,000 Answer 5,000 Goodwill Answer 87,500 Answer 0 Answer 87,500 Answer 0 Answer 87,500 Answer 0 Answer 87,500 Answer 0 Answer 137,500 Answer 5,000 Answer 132,500 Answer 5,000 Answer 127,500 Answer 5,000 Answer 122,500 Answer 5,000 b. Calculate and organize the profits and losses on intercompany transactions and balances. Downstream Upstream Intercompany profit on 1/1/16 Answer 290,000 Answer 0 Intercompany profit on 12/31/16 Answer 0 Answer 0 c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary. Equity investment at 1/1/16: 75% x book value of the net assets of subsidiary Answer 1,005,000 Add: Answer Answer 322,500 Less: Answer Answer 290,000 Answer 1,327,500 Equity investment at 12/31/16: 75% x book value of the net assets of subsidiary Answer 1,807,500 Add: Answer Answer 307,500 Less: Answer Answer 714,000 Answer 1,401,000 d. Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the year of consolidation. Equity Investment Equity Investment at 1/1/16 Answer 1,327,500 Answer 0 Net income Answer 150,000 Answer 30,000 Dividends Answer Answer 0 Answer 15,000 AAP amortization Answer 0 Answer 0 Answer Equity Investment at 12/31/16 Answer 1,401,000 Answer 0 e. Independently compute the owners equity attributable to the noncontrolling interest beginning and ending balances starting with the owners equity of the subsidiary. Noncontrolling interest at 1/1/16: 25% of book value of the net assets of subsidiary Answer 335,000 Add: Answer Answer 107,500 Less: Answer Answer 0 Answer 0 Noncontrolling interest at 12/31/16: 25% of book value of the net assets of subsidiary Answer 375,000 Add: Answer Answer 102,500 Less: Answer Answer 0 Answer 0 f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income. Parent's stand-alone net income Answer 322,250 Subsidiary's stand-alone net income Answer 200,000 Plus: Answer Answer 0 Less: Answer Answer 0 Less: 100% AAP amortization Answer 20,000 Consolidated net income Answer 0 Parent's stand-alone net income Answer 322,250 75% Subsidiary's stand-alone net income Answer 0 Plus: Answer Answer 0 Less: Answer Answer 0 Less: 75% AAP amortization Answer 15,000 Consolidated net income attributable to the controlling interest Answer 0 25% of subsidiary's stand-alone net income Answer 0 Plus: Answer Answer 0 Less: Answer Answer 0 Less: 25% AAP amortization Answer 5,000 Consolidated net income attributable to the noncontrolling interest Answer 0 g. Complete the consolidating entries according to the C-E-A-D-I sequence.