Consolidation subsequent to date of acquisitionEquity 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, 2011. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $350,000 in excess of the book value of the subsidiarys Stockholders Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiarys 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 2014, the subsidiary sold Equipment to the parent for a cash price of $250,000. The subsidiary acquired the equipment at a cost of $480,000 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 pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2016. The parent uses the equity method to account for its Equity Investment.

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$3,400,000	$900,000		Assets
Cost of goods sold	(2,400,000)	(500,000)		Cash	$619,500	$250,000
Gross profit	1,000,000	400,000		Accounts receivable	530,000	420,000
Income (loss) from subsidiary	85,875			Inventory	900,000	550,000
Operating expenses	(522,000)	(225,000)		PPE, net	3,500,000	1,000,000
Net income	$563,875	150,000		Equity investment	454,125
					$6,003,625	$2,220,000
Statement of retained earnings:
BOY retained earnings	$1,799,750	$200,000		Liabilities and stockholders equity
Net income	563,875	150,000		Accounts payable	$340,000	$250,000
				Other current liabilities	400,000	300,000
Dividends	(100,000)	(30,000)		Long-term liabilities	1,500,000	1,100,000
EOY retained earnings	$2,263,625	$320,000		Common stock	200,000	100,000
				APIC	1,300,000	150,000
				Retained earnings	2,263,625	320,000
					$6,003,625	$2,220,000

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

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.

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.

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

g. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet.