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 $280,000 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 $260,000. 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	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	427,218
					$5,982,393	$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
Dividends	(98,408)	(17,520)		Other current liabilities	402,220	201,480
EOY retained earnings	$2,203,974	$302,220		Long-term liabilities	1,500,000	1,100,000
				Common stock	186,914	108,624
				APIC	1,347,905	135,780
				Retained earnings	2,203,974	302,220
					$5,982,393	$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 your answers in part a.

Unamorti

Unamortized

Unamortized

Unamortized

Unamortized

Unamortized

Unamortized

zed

AAP

2008

AAP

2009

AAP

2010

AAP

2011

AAP

2012

AAP

2013

AAP

1/1/2008

Amortization

1/1/2009

Amortization

1/1/2010

Amortization

1/1/2011

Amortization

1/1/2012

Amortization

1/1/2013

Amortization

1/1/2014

Royalty agreement

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Controlling interest:

Royalty agreement

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Noncontrolling interest:

Royalty agreement

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.

Use negative signs with answers that are reductions.

		Downstream	Upstream
Answer		Answer	Answer
Less:	Answer	Answer	Answer
Answer		Answer	Answer

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		Answer
APIC		Answer
Retained earnings		Answer
Answer		Answer
Less:	Answer	Answer
		Answer
Equity investment at 12/31/13:
Common stock		Answer
APIC		Answer
Retained earnings		Answer
Answer		Answer

Less:	Answer	Answer
		Answer