Consolidation subsequent to date of acquisition- Equity method with noncontrolling interest, AAP, and upstream intercompany inventory sale Assume that, on January 1, 2007, a parent company acquired an 80% 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 (years)
Patent	$300,000	10
Goodwill	250,000	Indefinite
	$550,000

80% 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 2012 and 2013:

	2012	2013
Transfer price for inventory sale	$671,000	$733,000
Cost of goods sold	(615,000)	(653,000)
Gross profit	$56,000	$80,000
% inventory remaining	25%	35%
Gross profit deferred	$14,000	$28,000
EOY receivable/payable	$90,000	$100,000

The inventory not remaining at the end of the year has been sold outside of the controlled group.The parent and the subsidiary report the following financial statements at December 31, 2013:

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$6,770,000	$2,518,500		Assets
Cost of goods sold	(4,739,000)	(1,511,100)		Cash	$795,240	$696,785
Gross profit	2,031,000	1,007,400		Accounts receivable	866,560	584,292
Equity income	246,872			Inventory	1,313,380	750,513
Operating expenses	(1,242,600)	(654,810)		Equity investment	1,846,665
Net income	$1,035,272	352,590		Property, plant and equipment (PPE), net	6,317,764	1,388,533
					$11,139,609	$3,420,123
Statement of retained earnings:
BOY retained earnings	$3,401,248	$1,301,225		Liabilities and stockholders equity
Net income	1,035,272	352,590		Current liabilities	$972,849	$584,292
Dividends	(199,210)	(35,259)		Long-term liabilities	4,000,000	839,500
EOY retained earnings	$4,237,310	$1,618,556		Common stock	1,106,895	167,900
				APIC	822,555	209,875
				Retained earnings	4,237,310	1,618,556
					$11,139,609	$3,420,123

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

Do not enter any answers as negative numbers in part a.

	Unamortized		Unamortized		Unamortized		Unamortized		Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2007	AAP	2008	AAP	2009	AAP	2010	AAP	2011	AAP	2012	AAP	2013	AAP
	1/1/2007	Amortization	1/1/2008	Amortization	1/1/2009	Amortization	1/1/2010	Amortization	1/1/2011	Amortization	1/1/2012	Amortization	1/1/2013	Amortization	1/1/2014
AnswerPatentGoodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	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	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Controlling Interest:
AnswerPatentGoodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	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	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Noncontrolling Interest:
AnswerPatentGoodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	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	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 in inventory on 1/1/13	Answer	Answer
Intercompany profit in inventory on 12/31/13	Answer	Answer

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

Round answers to the nearest whole number. Use negative signs with answers that are deductions.

Equity investment at 1/1/13:
Common stock		Answer
APIC		Answer
Retained earnings		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
Equity investment at 12/31/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
Unamortized AAP		Answer
Less:	AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits	Answer
		Answer

d. Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the year of consolidation.

Round answers to the nearest whole number.

Equity Investment
Balance at 1/1/13	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
Balance at 12/31/13	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.

Round your answers to the nearest whole number. Use a negative sign with answers that are deductions.

Noncontrolling interest at 1/1/13:
Common stock		Answer
APIC		Answer
Retained earnings		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 12/31/13:
Common stock		Answer
APIC		Answer
Retained earnings		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.

Round your answers to the nearest whole number. Use a negative sign with answers that are deductions.

Consolidated:
Parent's stand-alone net income		Answer
Subsidiary's stand-alone net income		Answer
Plus:	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:	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
	100% AAP amortization	Answer
Subsidiary's adjusted stand-alone net income		Answer
Consolidated net income		Answer
Parent:
Parent's stand-alone net income		Answer
80% Subsidiary's stand-alone net income		Answer
Plus:	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:	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
	80% AAP amortization	Answer
80% of subsidiary's stand-alone net income		Answer
Consolidated net income attributable to the parent		Answer
Subsidiary:
20% of subsidiary's stand-alone net income		Answer
Plus:	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:	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
	20% AAP amortization	Answer
		Answer

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

Round answers to the nearest whole number.

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