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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

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