Consolidation subsequent to date of acquisition-Equity method with noncontrolling interest, AAP, and gain on upstream intercompany equipment sale A parent company acquired its 75% interest in its subsidiary on January 1, 2008. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $350,000 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 depreciation and amortization, with no salvage value.

In January 2011, the subsidiary sold Equipment to the parent for a cash price of $245,000. The subsidiary acquired the equipment at a cost of $480000 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 financial statements of the parent and its subsidiary for the year ended December 31, 2013. The parent uses the equity method to account for its Equity Investment.

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$3,380,000	$876,000		Assets
Cost of goods sold	(2,433,600)	(525,600)		Cash	$684,595	$243,272
Gross profit	946,400	350,400		Accounts receivable	591,500	376,680
Income (loss) from subsidiary	64,418			Inventory	878,800	481,800
Operating expenses	(507,000)	(227,760)		PPE, net	3,400,280	902,280
Net income	$503,818	122,640		Equity investment	437,531
					$5,992,706	$2,004,032
Statement of retained earnings:
BOY retained earnings	$1,812,627	$197,100		Liabilities and stockholders' equity
Net income	503,818	122,640		Accounts payable	$341,380	$155,928
Dividends	(112,471)	(17,520)		Other current liabilities	402,220	201,480
EOY retained earnings	$2,203,974	$302,220		Long-term liabilities	1,500,000	1,100,000
				Common stock	186,914	108,624
				APIC	1,358,218	135,780
				Retained earnings	2,203,974	302,220
					$5,992,706	$2,004,032

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

Use negative signs with answers that are reductions.

		Downstream	Upstream
Net intercompany profit deferred at 1/1/13		0	Answer
Less:	Deferred intercompany profit recognized during 2013	0	Answer
Net intercompany profit deferred at 12/31/13		0	Answer

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

Use negative signs with answers that are deductions.

Equity investment at 1/1/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
Unamortized AAP		Answer
Less:	75% 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:	75% of upstream deferred intercompany profits	Answer
		Answer

d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation.

Equity Investment
Balance at 1/1/13	Answer	0
Net income	Answer	Answer	Dividends
Upstream equipment profits	Answer	Answer	AAP amortization
Balance at 12/31/13	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.

Use negative signs with answers that are reductions.

Noncontrolling interest at 1/1/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
Unamortized AAP		Answer
Less:	25% of upstream deferred intercompany profits	Answer
		Answer
Noncontrolling interest at 12/31/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
Unamortized AAP		Answer
Less:	25% of upstream deferred intercompany profits	Answer
		Answer

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

Use negative signs with answers that are reductions.

Consolidated:
Parent's stand-alone net income		Answer
Subsidiary's stand-alone net income		Answer
Plus:	100% realized upstream deferred profits	Answer
Less:	100% AAP amortization	Answer
Subsidiary's adjusted stand-alone net income		Answer
Consolidated net income		Answer
Parent:
Parent's stand-alone net income		Answer
75% Subsidiary's stand-alone net income		Answer
Plus:	75% realized upstream deferred profits	Answer
Less:	75% AAP amortization	Answer
75% of subsidiary's stand-alone net income		Answer
Consolidated net income attributable to the parent		Answer
Subsidiary:
25% of subsidiary's stand-alone net income		Answer
Plus:	25% realized upstream deferred profits	Answer
Less:	25% AAP amortization	Answer
		Answer

g. Complete the consolidating entries according to the C-E-A-D-I sequence.

Consolidation Worksheet
Description		Debit	Credit
[C]	Equity income	Answer	Answer
	Consolidated net income attributable to noncontrolling interest	Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
	Noncontrolling interest	Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	Retained earnings	Answer	Answer
	Equity investment	Answer	Answer
	Noncontrolling interest	Answer	Answer
[A]	Royalty agreement	Answer	Answer
	Equity investment	Answer	Answer
	Noncontrolling interest	Answer	Answer
[D]	Operating expenses	Answer	Answer
	Royalty agreement	Answer	Answer
[Igain]	Equity investment	Answer	Answer
	Noncontrolling interest	Answer	Answer
	PPE, net	Answer	Answer
[Idep]	PPE, net	Answer	Answer
	Depreciation expense	Answer	Answer