Consolidation subsequent to date of acquisitionEquity method with noncontrolling interest,

AAP, and gain on upstream intercompany equipment sale

(Note: The facts in Problems 61 and 62 are identical, except for the direction of the intercompany sale of

equipment.) A parent company acquired its 70% interest in its subsidiary on January 1, 2014. On the ac-

quisition date, the total fair value of the controlling interest and the noncontrolling interest was $455,000

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 amortization, with no terminal value.

In January 2017, the subsidiary sold Equipment to the parent for a cash price of $325,000. The

subsidiary acquired the equipment at a cost of $624,000 and depreciated the equipment over its 10-year

useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equip-

ment 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 pre-consolidation financial statements of the parent and its subsidiary for the year

ended December 31, 2019. The parent uses the equity method to account for its Equity Investment.

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.

Parent Subsidiary Parent Subsidiary Income statement: Sales. ... Cost of goods sold Gross profit. .. Income (loss) from subsidiary. Operating expenses.. Net income... $1,170,000 (650,000) 520,000 $4,420,000 (3,120,000) 1,300,000 104,195 (678,600) $ 725,595 Balance sheet: Cash.. Accounts receivable Inventory... Property, plant, & equipment, net. Equity investment. Total assets $ 805,350 689,000 1,170,000 4,550,000 551,005 $7,765,355 $ 325,000 546,000 715,000 1,300,000 (325,000) $2,886,000 $195,000 Statement of retained earnings: Beginning retained earnings. Net income Dividends declared.. Ending retained earnings. $2,307,760 725,595 (130,000) $2,903,355 $260,000 195,000 (39,000) $416,000 Accounts payable. Other current liabilities Long-term liabilities.. Common stock . Additional paid-in capital. Retained earnings Total liabilities and equity. $ 442,000 520,000 1,950,000 260,000 1,690,000 2,903,355 $7,765,355 $ 325,000 390,000 1,430,000 130,000 195,000 416,000 $2,886,000 Parent Subsidiary Parent Subsidiary Income statement: Sales. ... Cost of goods sold Gross profit. .. Income (loss) from subsidiary. Operating expenses.. Net income... $1,170,000 (650,000) 520,000 $4,420,000 (3,120,000) 1,300,000 104,195 (678,600) $ 725,595 Balance sheet: Cash.. Accounts receivable Inventory... Property, plant, & equipment, net. Equity investment. Total assets $ 805,350 689,000 1,170,000 4,550,000 551,005 $7,765,355 $ 325,000 546,000 715,000 1,300,000 (325,000) $2,886,000 $195,000 Statement of retained earnings: Beginning retained earnings. Net income Dividends declared.. Ending retained earnings. $2,307,760 725,595 (130,000) $2,903,355 $260,000 195,000 (39,000) $416,000 Accounts payable. Other current liabilities Long-term liabilities.. Common stock . Additional paid-in capital. Retained earnings Total liabilities and equity. $ 442,000 520,000 1,950,000 260,000 1,690,000 2,903,355 $7,765,355 $ 325,000 390,000 1,430,000 130,000 195,000 416,000 $2,886,000