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

Assume, on January 1, 2013, a parent company acquired an 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $480,000 over the book value of the subsidiarys Stockholders Equity on the acquisition date. The parent assigned the excess to the following [A] assets:

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 2018 and 2019:

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, 2019:

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.)

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.

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

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.

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

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.

g. Complete the consolidating entries according to the C-E-A-D-I sequence.

[A] Asset Initial Fair Value Useful Life Patent $180,000 10 years Goodwill 300,000 Indefinite $480,000 2018 2019 Transfer price for inventory sale $500,000 $600,000 Cost of goods sold (420,000) (450,000) Gross profit $80,000 $150,000 % Inventory remaining 3596 2596 Gross profit deferred $28,000 $37,500 EOY receivable/payable $80,000 $140,000 Parent Subsidiary $500,000 700,000 900,000 $400,000 600,000 800,000 1,373,200 Parent Subsidiary Income statement: Balance sheet: Sales $6,700,000 $2,500,000 Cash Cost of goods sold (4.500,000) (1,500,000) Accounts receivable Gross profit 2,200,000 1,000,000 Inventory Income (loss) from subsidiary 138,000 Equity investment Property, plant and Operating expenses (2,000,000) (800,000) equipment (PPE), net Net income $338,000 $200,000 Statement of retained earnings: BOY retained earnings $2,035,200 $940,000 Current liabilities Net income 338,000 200,000 Long-term liabilities Dividends (200,000) (40,000) Common stock EOY retained earnings $2,173,200 $1,100,000 APIC Retained earnings 4,000,000 1,000,000 $7,473,200 $2,800,000 $800,000 3,000,000 500,000 $500,000 900,000 100,000 1,000,000 200,000 2,173,200 1,100,000 $7,473,200 $2,800,000 Unamortized 1/1/2013 2013 Amortization Unamortized 12/31/2013 2014 Amortization Unamortized 2015 12/31/2014 Amortization Unamortized 12/31/2015 2016 Amortization 10096 Patent Goodwill oy 8096 Patent Goodwill y 2096 Patent Goodwill 0 y Downstream Upstream 0X Intercompany profit on 1/1/19 Intercompany profit on 12/31/19 0 Equity investment at 1/1/19: 80% x book value of the net assets of subsidiary Add: Unamortized AAP Less: 80% of upstream deferred intercompany profits OX OX 0X 0 X Equity investment at 12/31/19: 80% x book value of the net assets of subsidiary Add: Unamortized AAP Less: 80% of upstream deferred intercompany profits OX OX OX Equity Investment OX 0 Equity Investment at 1/1/19 Net income BOY upstream inventory 0X 0 X 0 x Dividends O x AAP amortization 0 X EOY upstream inventor 0 Equity Investment at 12/31/19 OX Noncontrolling interest at 1/1/19: 2096 of book value of the net assets of subsidiary Add: Unamortized AAP Less: 20% of upstream deferred intercompany profits - 0 X 0 X 0 X OX Noncontrolling interest at 12/31/19: 20% of book value of the net assets of subsidiary Add: Unamortized AAP Less: 20% of upstream deferred intercompany profits OX OX OX OX OX 0x OX OX Parent's stand-alone net income Subsidiary's stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Consolidated net income Parent's stand-alone net income 80% Subsidiary's stand-alone net income Plus: 80% realized upstream deferred profits Less: 80% unrealized upstream deferred profits Less: 80% AAP amortization Consolidated net income attributable to the controlling interest 20% of subsidiary's stand-alone net income Plus: 20% realized upstream deferred profits Less: 20% unrealized upstream deferred profits Less: 20% AAP amortization Consolidated net income attributable to the noncontrolling interest > OX Ox Ox OX OX OX OX 0x Credit Debit 0 > OX 0 0 OX 0 > OX OX 0 0X 0 > 0 X 0 0 x > 0 X OX Consolidation Worksheet Description [C] Equity income Consolidated net income attributable to noncontrolling interest Dividends Equity investment Noncontrolling interest [E] Common stock APIC Retained earnings Equity investment Noncontrolling interest [A] Patent Goodwill Equity investment Noncontrolling interest [D] Operating expenses Patent [lcogs] Equity investment Noncontrolling interest Cost of goods sold [lsales] Sales Cost of goods sold [lcogs] Cost of goods sold Inventory 0 0X 0 0 Ox > OX . 0 > > > 0 OX 0 1 0 x 0 0 OX > > OX 0 0 OX 0 X 0 0 OX [lpay] OX 0 Accounts payable Accounts receivable 0 OX [A] Asset Initial Fair Value Useful Life Patent $180,000 10 years Goodwill 300,000 Indefinite $480,000 2018 2019 Transfer price for inventory sale $500,000 $600,000 Cost of goods sold (420,000) (450,000) Gross profit $80,000 $150,000 % Inventory remaining 3596 2596 Gross profit deferred $28,000 $37,500 EOY receivable/payable $80,000 $140,000 Parent Subsidiary $500,000 700,000 900,000 $400,000 600,000 800,000 1,373,200 Parent Subsidiary Income statement: Balance sheet: Sales $6,700,000 $2,500,000 Cash Cost of goods sold (4.500,000) (1,500,000) Accounts receivable Gross profit 2,200,000 1,000,000 Inventory Income (loss) from subsidiary 138,000 Equity investment Property, plant and Operating expenses (2,000,000) (800,000) equipment (PPE), net Net income $338,000 $200,000 Statement of retained earnings: BOY retained earnings $2,035,200 $940,000 Current liabilities Net income 338,000 200,000 Long-term liabilities Dividends (200,000) (40,000) Common stock EOY retained earnings $2,173,200 $1,100,000 APIC Retained earnings 4,000,000 1,000,000 $7,473,200 $2,800,000 $800,000 3,000,000 500,000 $500,000 900,000 100,000 1,000,000 200,000 2,173,200 1,100,000 $7,473,200 $2,800,000 Unamortized 1/1/2013 2013 Amortization Unamortized 12/31/2013 2014 Amortization Unamortized 2015 12/31/2014 Amortization Unamortized 12/31/2015 2016 Amortization 10096 Patent Goodwill oy 8096 Patent Goodwill y 2096 Patent Goodwill 0 y Downstream Upstream 0X Intercompany profit on 1/1/19 Intercompany profit on 12/31/19 0 Equity investment at 1/1/19: 80% x book value of the net assets of subsidiary Add: Unamortized AAP Less: 80% of upstream deferred intercompany profits OX OX 0X 0 X Equity investment at 12/31/19: 80% x book value of the net assets of subsidiary Add: Unamortized AAP Less: 80% of upstream deferred intercompany profits OX OX OX Equity Investment OX 0 Equity Investment at 1/1/19 Net income BOY upstream inventory 0X 0 X 0 x Dividends O x AAP amortization 0 X EOY upstream inventor 0 Equity Investment at 12/31/19 OX Noncontrolling interest at 1/1/19: 2096 of book value of the net assets of subsidiary Add: Unamortized AAP Less: 20% of upstream deferred intercompany profits - 0 X 0 X 0 X OX Noncontrolling interest at 12/31/19: 20% of book value of the net assets of subsidiary Add: Unamortized AAP Less: 20% of upstream deferred intercompany profits OX OX OX OX OX 0x OX OX Parent's stand-alone net income Subsidiary's stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% unrealized upstream deferred profits Less: 100% AAP amortization Consolidated net income Parent's stand-alone net income 80% Subsidiary's stand-alone net income Plus: 80% realized upstream deferred profits Less: 80% unrealized upstream deferred profits Less: 80% AAP amortization Consolidated net income attributable to the controlling interest 20% of subsidiary's stand-alone net income Plus: 20% realized upstream deferred profits Less: 20% unrealized upstream deferred profits Less: 20% AAP amortization Consolidated net income attributable to the noncontrolling interest > OX Ox Ox OX OX OX OX 0x Credit Debit 0 > OX 0 0 OX 0 > OX OX 0 0X 0 > 0 X 0 0 x > 0 X OX Consolidation Worksheet Description [C] Equity income Consolidated net income attributable to noncontrolling interest Dividends Equity investment Noncontrolling interest [E] Common stock APIC Retained earnings Equity investment Noncontrolling interest [A] Patent Goodwill Equity investment Noncontrolling interest [D] Operating expenses Patent [lcogs] Equity investment Noncontrolling interest Cost of goods sold [lsales] Sales Cost of goods sold [lcogs] Cost of goods sold Inventory 0 0X 0 0 Ox > OX . 0 > > > 0 OX 0 1 0 x 0 0 OX > > OX 0 0 OX 0 X 0 0 OX [lpay] OX 0 Accounts payable Accounts receivable 0 OX