Consolidation subsequent to date of acquisitionEquity 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 $490,000 in excess of the book value of the subsidiarys Stockholders Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiarys 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 $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 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	50,355			Inventory	878,800	481,800
Operating expenses	(507,000)	(227,760)		PPE, net	3,400,280	902,280
Net income	$489,755	122,640		Equity investment	451,593
					$6,006,768	$2,004,032
Statement of retained earnings:
BOY retained earnings	$1,812,627	$197,100		Liabilities and stockholders equity
Net income	489,755	122,640		Accounts payable	$341,380	$155,928
				Other current liabilities	402,220	201,480
Dividends	(98,408)	(17,520)		Long-term liabilities	1,500,000	1,100,000
EOY retained earnings	$2,203,974	$302,220		Common stock	186,914	108,624
				APIC	1,372,280	135,780
				Retained earnings	2,203,974	302,220
					$6,006,768	$2,004,032

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. Do no enter any negative answers in part a. 2008 Amortization 0 Unamortized AAP 1/1/2009 0 2009 Amortization 0 Unamortized 1/1/2010 2010 Amortization 0 Unamortized 1/1/2011 0 2011 Amortization 0 Unamortized 1/1/2012 0 2012 Amortization 0 Unamortized 1/1/2013 0 2013 Amortization 0 Unamortized AAP 1/1/2014 0 0 Unamortized AAP 1/1/2008 Royalty agreement 0 Controlling interest: Royalty agreement 0 Noncontrolling interest: Royalty agreement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 b. Calculate and organize the profits and losses on intercompany transactions and balances. Use negative signs with answers that are reductions. Downstream Upstream 0 0 0 0 0 0 0 Less: 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 APIC 0 0 Retained earnings 0 0 Less: 0 0 Equity investment at 12/31/13: Common stock APIC 0 0 Retained earnings 0 0 Less: 0 0 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 0 Net income 0 0 Dividends 0 0 Balance at 12/31/13 0 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 0 APIC Retained earnings 0 0 0 Less: 0 O 0 Noncontrolling interest at 12/31/13: Common stock APIC Retained earnings 0 0 0 Less: 0 0 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 Subsidiary's stand-alone net income 0 0 Plus: e 0 0 0 0 0 0 Less: Subsidiary's adjusted stand-alone net income Consolidated net income Parent: Parent's stand-alone net income 75% Subsidiary's stand-alone net income Plus: Less: 75% of subsidiary's stand-alone net income Consolidated net income attributable to the parent Subsidiary: 25% of subsidiary's stand-alone net income Plus: e . 0 0 0 0 0 0 Less: 0 0 g. Complete the consolidating entries according to the C-E-A-D-I sequence. Consolidation Worksheet Description [C] Equity income Debit Credit 0 0 0 0 0 0 0 Dividends Equity investment 0 0 0 0 [E] O 0 Common stock APIC 0 0 0 0 Equity investment 0 0 + O 0 [A] 0 0 0 Equity investment 0 0 0 [D] Operating expenses O O O 0 0 0 [lgain) Equity investment 0 . 0 0 0 0 > > [ldep] 0 O O 0