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 $560,000 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 $240,000. 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.

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	Answer
Net income	Answer	Answer	Dividends
AnswerNet incomeUpstream equipment profitsDividendsAAP amortization	Answer	Answer	AnswerNet incomeUpstream equipment 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.

Use negative signs with answers that are reductions.

Noncontrolling interest at 1/1/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits		Answer
Less:	AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits	Answer
		Answer
Noncontrolling interest at 12/31/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits		Answer
Less:	AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% 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:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% AAP amortization	Answer
Less:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% 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:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% AAP amortization	Answer
Less:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% 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:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% AAP amortization	Answer
Less:	Answer100% realized upstream deferred profits75% realized upstream deferred profits25% realized upstream deferred profits100% AAP amortization75% AAP amortization25% 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
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	Equity investment	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
[A]	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	Equity investment	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
[D]	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
[Igain]	Equity investment	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
[Idep]	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer
	AnswerPPE, netRoyalty agreementEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsOperating expensesDepreciation expense	Answer	Answer