Question
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
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 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $456,000 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 | $171,000 | 10 years |
Goodwill | 285,000 | Indefinite |
$456,000 |
80% of the Goodwill is allocated to the parent. 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 as of 2021 and 2022:
2021 | 2022 | |
---|---|---|
Transfer price for inventory sale | $475,000 | $570,000 |
Cost of goods sold | (399,000) | (427,500) |
Gross profit | $76,000 | $142,500 |
% Inventory remaining | 35% | 25% |
Gross profit deferred | $26,600 | $35,625 |
EOY receivable/payable | $76,000 | $133,000 |
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, 2022:
Parent | Subsidiary | Parent | Subsidiary | |||
---|---|---|---|---|---|---|
Income statement: | Balance sheet: | |||||
Sales | $6,365,000 | $2,375,000 | Cash | $475,000 | $380,000 | |
Cost of goods sold | (4,275,000) | (1,425,000) | Accounts receivable | 665,000 | 570,000 | |
Gross profit | 2,090,000 | 950,000 | Inventory | 855,000 | 760,000 | |
Income (loss) from subsidiary | 131,100 | Equity investment | 1,304,540 | |||
Operating expenses | (1,900,000) | (760,000) | Property, plant and equipment (PPE), net | 3,800,000 | 950,000 | |
Net income | $321,100 | $190,000 | $7,099,540 | $2,660,000 | ||
Statement of retained earnings: | ||||||
BOY retained earnings | $1,933,440 | $893,000 | Current liabilities | $760,000 | $475,000 | |
Net income | 321,100 | 190,000 | Long-term liabilities | 2,850,000 | 855,000 | |
Dividends | (190,000) | (38,000) | Common stock | 475,000 | 95,000 | |
EOY retained earnings | $2,064,540 | $1,045,000 | APIC | 950,000 | 190,000 | |
Retained earnings | 2,064,540 | 1,045,000 | ||||
$7,099,540 | $2,660,000 |
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 | 2016 | AAP | 2017 | AAP | 2018 | AAP | 2019 | |
1/1/2016 | Amortization | 12/31/2016 | Amortization | 12/31/2017 | Amortization | 12/31/2018 | 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 | |
80% | ||||||||
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 | |
20% | ||||||||
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 1/1/22 | Answer | Answer |
Intercompany profit on 12/31/22 | 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 1/1/122: | ||
80% x book value of the net assets of subsidiary | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer | |
Answer | ||
Equity investment at 12/31/22: | ||
80% x book value of the net assets of subsidiary | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | 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 1/1/22 | Answer | Answer | |
Net income | Answer | Answer | Dividends |
AnswerNet incomeBOY upstream inventory profitsEOY upstream inventory profitsDividendsAAP amortization | Answer | Answer | AAP amortization |
Answer | Answer | AnswerNet incomeBOY upstream inventory profitsEOY upstream inventory profitsDividendsAAP amortization | |
Equity Investment at 12/31/22 | 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 1/1/22: | ||
20% of book value of the net assets of subsidiary | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer | |
Less: | AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer |
Answer | ||
Noncontrolling interest at 12/31/22: | ||
20% of book value of the net assets of subsidiary | Answer | |
AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | Answer | |
Less: | AnswerCommon stockAPICRetained earningsUnamortized AAP80% of upstream deferred intercompany profits20% of upstream deferred intercompany profits | 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 |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Less: 100% AAP amortization | Answer |
Consolidated net income | Answer |
Parent's stand-alone net income | Answer |
80% Subsidiary's stand-alone net income | Answer |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Less: 80% AAP amortization | Answer |
Consolidated net income attributable to the controlling interest | Answer |
20% of subsidiary's stand-alone net income | Answer |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Answer80% AAP amortization20% AAP amortization100% AAP amortization80% realized upstream deferred profits20% realized upstream deferred profits100% realized upstream deferred profits80% unrealized upstream deferred profits20% unrealized upstream deferred profits100% unrealized upstream deferred profits | Answer |
Less: 20% 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 |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
Dividends | Answer | Answer | |
Equity investment | Answer | Answer | |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[E] | Common stock | Answer | Answer |
APIC | Answer | Answer | |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
Equity investment | Answer | Answer | |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[A] | Patent | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
Equity investment | Answer | Answer | |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[D] | AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[Icogs] | Equity investment | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[Isales] | AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[Icogs] | AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer | |
[Ipay] | AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer |
AnswerAccounts receivableInventoryAccounts payableEquity incomeConsolidated net income attributable to noncontrolling interestDividendsEquity investmentNoncontrolling interestRetained earningsPatentGoodwillSalesCost of goods soldOperating expenses | Answer | Answer |
Please answer all parts of the question.
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