Chapter 5 Problem 62. Consolidation subsequent to date of acquisition-Equity method with noncontrolling interest, AAP, and gain on upstream intercompany equipment sale A parent company acquired its 70% interest in its subsidiary on January 1, 2014. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $455,000 in excess of the book value of the subsidiary's Stockholders' Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary's financial statements (i.e., there is no Goodwill). The Royalty Agreement has a 7 year estimated remaining economic life on the acquisition date. Both companies use straight-line amortization, with no terminal value. In January 2017, the subsidiary sold Equipment to the parent for a cash price of $325,000. The subsidiary acquired the equipment at a cost of $624,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 6 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 4-year useful life. Following are pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2019. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Sales.... Cost of goods sold Gross profit. Income (loss) from subsidiary. Operating expenses. Net income $4,420,000 $1,170,000 (3,120,000) (650,000) 1,300,000 520,000 104,195 (678,600) (325,000) $ 725,595 $195,000 Balance sheet: Cash. Accounts receivable Inventory Property, plant, & equipment, net Equity vestment Total assets. $ 805,350 689,000 1,170,000 4,550,000 551,005 $7,765,355 $ 325,000 546,000 715,000 1,300,000 $2,886,000 Statement of retained earnings: Beginning retained earnings. Net income Dividends declared. Ending retained earnings. $2,307,760 725,595 (130,000) $2,903,355 $260,000 195,000 (39,000) $416,000 Accounts payable Other current liabilities Long-term liabilities. Common stock Additional paid-in capital. Retained earnings Total liabilities and equity $ 442,000 520,000 1,950,000 260,000 1,690,000 2,903,355 $7,765,355 $ 325,000 390,000 1,430,000 130,000 195,000 416,000 $2,886,000 Requirements: a. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet. b. Independently calculate controlling interest net income and noncontrolling interest net income. Chapter 5 Problem 62. Consolidation subsequent to date of acquisition-Equity method with noncontrolling interest, AAP, and gain on upstream intercompany equipment sale A parent company acquired its 70% interest in its subsidiary on January 1, 2014. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $455,000 in excess of the book value of the subsidiary's Stockholders' Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary's financial statements (i.e., there is no Goodwill). The Royalty Agreement has a 7 year estimated remaining economic life on the acquisition date. Both companies use straight-line amortization, with no terminal value. In January 2017, the subsidiary sold Equipment to the parent for a cash price of $325,000. The subsidiary acquired the equipment at a cost of $624,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 6 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 4-year useful life. Following are pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2019. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Sales.... Cost of goods sold Gross profit. Income (loss) from subsidiary. Operating expenses. Net income $4,420,000 $1,170,000 (3,120,000) (650,000) 1,300,000 520,000 104,195 (678,600) (325,000) $ 725,595 $195,000 Balance sheet: Cash. Accounts receivable Inventory Property, plant, & equipment, net Equity vestment Total assets. $ 805,350 689,000 1,170,000 4,550,000 551,005 $7,765,355 $ 325,000 546,000 715,000 1,300,000 $2,886,000 Statement of retained earnings: Beginning retained earnings. Net income Dividends declared. Ending retained earnings. $2,307,760 725,595 (130,000) $2,903,355 $260,000 195,000 (39,000) $416,000 Accounts payable Other current liabilities Long-term liabilities. Common stock Additional paid-in capital. Retained earnings Total liabilities and equity $ 442,000 520,000 1,950,000 260,000 1,690,000 2,903,355 $7,765,355 $ 325,000 390,000 1,430,000 130,000 195,000 416,000 $2,886,000 Requirements: a. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet. b. Independently calculate controlling interest net income and noncontrolling interest net income
