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 Income (loss) from subsidiary 64,418 350,400 Accounts receivable Inventory Operating expenses (507,000) (227,760) PPE, net Net income $503,818 122,640 Equity investment 591,500 376,680 878,800 481,800 3,400,280 902,280 437,531 $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