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

Assume that, 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 $430,000 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 (years)
Property, plant and equipment (PPE), net	$180,000	15
Patent	250,000	10
	$430,000

This acquisition resulted in no recognized goodwill. 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 for the years ending 2015 and 2016

	2015	2016
Transfer price for inventory sale	$200,000	$300,000
Cost of goods sold	(140,000)	(200,000)
Gross profit	$60,000	$100,000
% inventory remaining	25%	35%
Gross profit deferred	$15,000	$35,000
EOY receivable/payable	$80,000	$90,000

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	$6,500,000	$1,200,000		Cash	$450,000	$50,000
Cost of goods sold	(4,500,000)	(750,000)		Accounts receivable	250,000	300,000
Gross profit	2,000,000	450,000		Inventory	650,000	400,000
Income (loss) from subsidiary	74,400			Equity investment	1,021,600
Operating expenses	(1,200,000)	(300,000)		Property, plant and equipment (PPE), net	5,000,000	650,000
Net income	$874,400	150,000			$7,371,600	$1,400,000
Statement of retained earnings:				Liabilities and stockholders equity
BOY retained earnings	$3,000,000	$600,000		Current liabilities	$600,000	$70,000
Net income	874,400	150,000		Long-term liabilities	1,559,200	300,000
Dividends	(250,000)	(20,000)		Common stock	800,000	100,000
EOY retained earnings	$3,624,400	$730,000		APIC	788,000	200,000
				Retained earnings	3,624,400	730,000
					$7,371,600	$1,400,000

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

	Downstream	Upstream
Intercompany profit on 1/1/16
Intercompany profit on 12/31/16