Consolidation subsequent to date of acquisition - Equity method with noncontrolling interest AAP, and upstream intercompany inventory sale

Assume, on January 1, 2013, a parent company acquired an 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $480,000 over the book value of the subsidiary's stockholder's equity on the acquisition date. The parent assigned the excess to the following [A] assets:

[A] Asset Initial Fair Value Useful Life

Patent...................................................... $180,000 10 years

Goodwill.................................................. $300,000 Indefinite

Total $480,000

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 2018 and 2019:

2018 2019

Transfer price for inventory sale................................. $500,000 $600,000

COGS...................................................................................... (420,000) (450,000)

Gross profit......................................................................... $80,000 $150,000

% of inventory remaining................................................ 35% 25%

Gross profit deferred...................................................... $28,000 $37,000

EOY receivable/payable.................................................. $80,000 $140,000

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 finacial statements at December 31, 2019:

Parent Subsidiary

Income statement:

Sales....................................................................................... $6,700,000 $2,500,000

COGS..................................................................................... (4,500,000) (1,500,000)

Gross profit ..................................................................... $2,200,000 $1,000,000

Income (loss) from subsidiary .................................. 138,000

Operating expenses....................................................... (2,000,000) (800,000)

Net income............................................................................... $338,000 $200,000

Statement of retained earnings

Beginning retained earnings ........................................... $2,035,200 $940,000

Net income ................................................................................ 338,000 200,000

Dividends......................................................................................... (200,000) (40,000)

Ending retained earnings ......................................................... $2,173,200 $1,100,000

Balance sheet:

Cash........................................................................................................ $500,000 $400,000

Accounts recieivable....................................................................... 700,000 600,000

Inventory............................................................................................. 900,000 800,000

Equity investment ........................................................................... 1,373,200

PPE net................................................................................................. 4,000,000 1,000,000

$7,473,200 $2,800,000

Current liabilities.............................................................................. $800,000 $500,000

Long term liabilities..................................................................... $3,000,000 90,000

Common stock............................................................................... 500,000 100,000

Additional paid in capital........................................................... 1,000,000 200,000

Retained earnings......................................................................... 2,173,200 1,100,000

$7,473,200 $2,800,000

QUESTIONS BELOW

a. Disaggregate and document the activity for the 100% acquisition accounting premium, the controlling interest AAP and the noncontrolling interest AAP.

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

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

d. Reconstruct the activity in the parents pre-consolidation equity investment T-account for the year of consolidation

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

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

g. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet.