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, 2011. 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 2014, the subsidiary sold Equipment to the parent for a cash price of $250,000. The subsidiary acquired the equipment at a cost of $480,000 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, 2016. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Balance sheet: Sales Cost of goods sold Gross profit $3,400,000 $900,000 Assets (2,400,000) (500,000) Cash 1,000,000 $619,500 $250,000 Income (loss) from subsidiary 85,875 400,000 Accounts receivable Inventory 530,000 420,000 900,000 550,000 Operating expenses (522,000) (225,000) PPE, net Net income $563,875 150,000 Equity investment 3,500,000 1,000,000 454,125 $6,003,625 $2,220,000 Statement of retained earnings: BOY retained earnings Net income $1,799,750 $200,000 Liabilities and stockholders' equity 563,875 150,000 Accounts payable $340,000 $250,000 Dividends (100,000) EOY retained earnings $2,263,625 Other current liabilities (30,000) Long-term liabilities $320,000 Common stock 400,000 300,000 1,500,000 1,100,000 200,000 100,000 APIC 1,300,000 150,000 Retained earnings 2,263,625 320,000 $6,003,625 $2,220,000