Consolidation subsequent to date of acquisitionEquity method with noncontrolling interest,

AAP, and upstream intercompany inventory sale

Assume, on January 1, 2016, a parent company acquired an 85% interest in its subsidiary. The total fair

value of the controlling and noncontrolling interests was $500,000 over the book value of the subsidiarys

Stockholders Equity on the acquisition date. The parent assigned the excess to the following

[A] assets:

[A] Asset Initial Fair Value Useful Life

Property, plant and equipment (PPE), net . . . . . . . . . . . . . . . . . . $240,000 12 years

Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,000 10 years

$500,000

This acquisition resulted in no recognized goodwill. Assume the subsidiary sells inventory to the parent

(upstream) which includes that inventory in products that it ultimately sells to customers outside of the

controlled group. You have compiled the following data for the years ending 2018 and 2019:

2018 2019

Transfer price for inventory sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 $350,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220,000) (230,000)

Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000 $120,000

% Inventory remaining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% 35%

Gross profit deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000 $ 42,000

EOY receivable/payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000 $105,000

The inventory not remaining at the end of the year has been sold outside of the controlled group. The

parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsid-

iary report the following pre-consolidation financial statements at December 31, 2019:

The inventory not remaining at the end of the year has been sold outside of the controlled group. The

parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsid-

iary report the following pre-consolidation financial statements at December 31, 2019:

Parent Subsidiary Parent Subsidiary

Income statement:

Balance sheet:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,000 $ 60,000

Accounts receivable . . . . . . . . . . . . . . . . . . . 550,000 300,000

Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,000 400,000

Equity investment . . . . . . . . . . . . . . . . . . . . . 1,176,400

Property, plant and equipment, net . . . . . . . 4,000,000

850,000

$6,976,400 $1,610,000

Current liabilities. . . . . . . . . . . . . . . . . . . . . . $ 700,000 $ 100,000

Long-term liabilities. . . . . . . . . . . . . . . . . . . . 2,000,000 400,000

Common stock . . . . . . . . . . . . . . . . . . . . . . . 600,000 100,000

Additional paid-in capital. . . . . . . . . . . . . . . . 1,000,000 200,000

Retained earnings . . . . . . . . . . . . . . . . . . . . 2,676,400 810,000

$6,976,400 $1,610,000

Sales. . . . . . . . . . . . . . . . . . . . . $6,000,000 $1,500,000

Cost of goods sold . . . . . . . . . . (4,000,000) (1,000,000)

Gross profit. . . . . . . . . . . . . . . . 2,000,000 500,000

Income (loss) from subsidiary . . 112,200

Operating expenses . . . . . . . . . (1,200,000) (300,000)

Net income . . . . . . . . . . . . . . . . $ 912,200 $ 200,000

Statement of retained earnings:

Beginning retained earnings. . . $2,014,200 $ 630,000

Net income . . . . . . . . . . . . . . . . 912,200 200,000

Dividends . . . . . . . . . . . . . . . . . (250,000) (20,000)

Ending retained earnings . . . . . $2,676,400 $ 810,000

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP),

the controlling interest AAP and the noncontrolling interest AAP.

b. Calculate and organize the profits and losses on intercompany transactions and balances.

c. Compute the pre-consolidation Equity Investment account beginning and ending balances

starting with the stockholders equity of the subsidiary.

d. Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the

year of consolidation.

e. Independently compute the owners equity attributable to the noncontrolling interest beginning

and ending balances starting with the owners equity of the subsidiary.

f. Independently calculate consolidated net income, controlling interest net income and

noncontrolling interest net income.

g. Complete the consolidating entries according to the

C-E-A-D-I sequence and complete the

consolidation worksheet.