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. Parent Parent Subsidiary Income statement: Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses Net income $3,380,000 (2,424,225) 955,775 40,980 (507,000) $489,755 Subsidiary Balance sheet: $876,000 Assets (525,600) Cash 350,400 Accounts receivable Inventory (227,760) PPE, net 122,640 Equity investment $684,595 $243,272 591,500 376,680 878,800 481,800 3,400,280 902,280 460,968 $6,016,143 $2,004,032 Statement of retained earnings: BOY retained earnings $1,812,627 Net income 489,755 Dividends (98,408) EOY retained earnings $2,203,974 $197,100 Liabilities and stockholders' equity 122,640 Accounts payable (17,520) Other current liabilities $302,220 Long-term liabilities Common stock $341,380 402,220 1,500,000 186,914 $155,928 201,480 1,100,000 108,624 APIC Retained earnings 1,381,655 135,780 2,203,974 302,220 $6,016,143 $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 not use negative signs with any of your answers in part a. Unamortized Unamortized Unamortized Unamortized Unamortized Unamortized AAP 2008 AAP 2009 2010 2011 2012 1/1/2008 Amortization 1/1/2009 Amortization 1/1/2010 Amortization 1/1/2011 Amortization 1/1/2012 Amortization 1/1/2013 Royalty agreement 0 0 0 0 0 0 0 0 Controlling interest: Royalty agreement 0 0 0 0 0 0 0 0 0 Noncontrolling interest: Royalty agreement 0 0 0 0 0 0 0 0 0 2013 Amortizat 0 0 0 0 0 0 0 b. Calculate and organize the profits and losses on intercompany transactions and balances. Use a negative signs with answers that are reductions. Downstream Upstream 0 0 Less: > > > 0 0 0 0 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 0 APIC Retained earnings 0 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 Dividends 0 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 0 Retained earnings 0 0 Less: 0 0 Noncontrolling interest at 12/31/13: Common stock APIC 0 0 Retained earnings 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. 0 0 . 0 Consolidated: Parent's stand-alone net income Subsidiary's stand-alone net income Plus: Less: Subsidiary's adjusted stand-alone net income Consolidated net income Parent: 0 0 0 0 0 0 0 0 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: Less: 0 0 0 0 0 g. Complete the consolidating entries according to the C-E-A-D-I sequence. Consolidation Worksheet Description Debit [C] Equity income Credit 0 0 0 0 0 0 Dividends Equity investment 0 0 0 0 [E] 0 0 Common stock APIC 0 0 0 0 0 Equity investment 0 0 0 [A] 0 0 Equity investment 0 0 0 0 [D] 0 0 0 0 Ilgain) Equity investment 0 0 0 0 0 0 >