Consolidation subsequent to date of acquisitionEquity method with noncontrolling interest, AAP, and upstream intercompany inventory sale

Assume that, on January 1, 2010, a parent company acquired a 75% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $550,000 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
Patent	$200,000	10 years
Goodwill	350,000	Indefinite
	$550,000

75% of the Goodwill is allocated to the parent. Assume that 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 as of 2015 and 2016:

	2015	2016
Transfer price for inventory sale	$600,000	$700,000
Cost of goods sold	(500,000)	(580,000)
Gross profit	$100,000	$120,000
% Inventory remaining	25%	35%
Gross profit deferred	$25,000	$42,000
EOY receivable/payable	$70,000	$120,000

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 subsidiary report the following pre-consolidation financial statements at December 31, 2016:

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$6,700,000	$2,500,000		Cash	$600,000	$400,000
Cost of goods sold	(4,500,000)	(1,500,000)		Accounts receivable	800,000	600,000
Gross profit	2,200,000	1,000,000		Inventory	1,000,000	800,000
Income (loss) from subsidiary	122,250			Equity investment	1,401,000
Operating expenses	(2,000,000)	(800,000)		Property, plant and equipment (PPE), net	3,700,000	1,000,000
Net income	$322,250	$200,000			$7,501,000	$2,800,000
Statement of retained earnings:
BOY retained earnings	$2,000,000	$1,000,000		Current liabilities	$878,750	$500,000
Net income	322,250	200,000		Long-term liabilities	3,000,000	800,000
Dividends	(200,000)	(40,000)		Common stock	500,000	140,000
EOY retained earnings	$2,122,250	$1,160,000		APIC	1,000,000	200,000
				Retained earnings	2,122,250	1,160,000
					$7,501,000	$2,800,000

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. (Complete for the first four years only.)

	Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2010	AAP	2011	AAP	2012	AAP	2013
	1/1/2010	Amortization	12/31/2010	Amortization	12/31/2011	Amortization	12/31/2012	Amortization
100%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
75%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
25%
Patent	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer

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

	Downstream	Upstream
Intercompany profit on 1/1/16	Answer	Answer
Intercompany profit on 12/31/16	Answer	Answer

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary.

Use a negative sign with your answer to indicate a reduction to net income.

Equity investment at 1/1/16:
75% x book value of the net assets of subsidiary		Answer
		Answer
		Answer
		Answer
Equity investment at 12/31/16:
75% x book value of the net assets of subsidiary		Answer
		Answer
		Answer
		Answer

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

Equity Investment
Equity Investment at 1/1/16	Answer	Answer
Net income	Answer	Answer	Dividends
	Answer	Answer	AAP amortization
	Answer	Answer
Equity Investment at 12/31/16	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 a negative sign with your answer to indicate a reduction to net income.

Noncontrolling interest at 1/1/16:
25% of book value of the net assets of subsidiary		Answer
		Answer
Less:		Answer
		Answer
Noncontrolling interest at 12/31/16:
25% of book value of the net assets of subsidiary		Answer
		Answer
Less:		Answer
		Answer

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

Use a negative sign with your answer to indicate a reduction to net income.

Parent's stand-alone net income	Answer
Subsidiary's stand-alone net income	Answer
	Answer
	Answer
Less: 100% AAP amortization	Answer
Consolidated net income	Answer
Parent's stand-alone net income	Answer
75% Subsidiary's stand-alone net income	Answer
	Answer
	Answer
Less: 75% AAP amortization	Answer
Consolidated net income attributable to the controlling interest	Answer
25% of subsidiary's stand-alone net income	Answer
	Answer
	Answer
Less: 25% AAP amortization	Answer
Consolidated net income attributable to the noncontrolling interest	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
		Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
		Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[A]	Patent	Answer	Answer
		Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[D]		Answer	Answer
		Answer	Answer
[Icogs]	Equity investment	Answer	Answer
		Answer	Answer
		Answer	Answer
[Isales]		Answer	Answer
		Answer	Answer
[Icogs]		Answer	Answer
		Answer	Answer
[Ipay]		Answer	Answer
		Answer	Answer