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

31 points Assume that, on January 1, 2007, a parent company acquired an 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $550,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date. the parent assigned the excess to the following [A] assets:

[A] Asset	Initial Fair Value	Useful Life (years)
Patent	$300,000	10
Goodwill	250,000	Indefinite
	$550,000

80% of the Goodwill is allocated to the parent. Assume that 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 2012 and 2013:

	2012	2013
Transfer price for inventory sale	$674,000	$733,000
Cost of goods sold	(615,000)	(653,000)
Gross profit	$59,000	$80,000
% inventory remaining	25%	35%
Gross profit deferred	$14,750	$28,000
EOY receivable/payable	$93,000	$105,000

The inventory not remaining at the end of the year has been sold outside of the controlled group.

The parent and the subsidiary report the following financial statements at December 31, 2013:

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$6,770,000	$2,521,500		Assets
Cost of goods sold	(4,739,000)	(1,511,100)		Cash	$798,240	$699,785
Gross profit	2,031,000	1,010,400		Accounts receivable	866,560	584,292
Equity income	249,872			Inventory	1,313,380	750,513
Operating expenses	(1,242,600)	(654,810)		Equity investment	1,849,065
Net income	$1,038,272	355,590		Property, plant and equipment (PPE), net	6,317,764	1,388,533
					$11,145,009	$3,423,123
Statement of retained earnings:
BOY retained earnings	$3,401,248	$1,301,225		Liabilities and stockholders' equity
Net income	1,038,272	355,590		Current liabilities	$972,849	$584,292
Dividends	(199,210)	(35,259)		Long-term liabilities	4,000,000	839,500
EOY retained earnings	$4,240,310	$1,621,556		Common stock	1,106,895	167,900
				APIC	824,955	209,875
				Retained earnings	4,240,310	1,621,556
					$11,145,009	$3,423,123

Journal Entries:

a. Beg. Bal Noncontrolling interest's equity

Stockholders Equity

Deferred gain

Assets

Income, net amort. of AAP

Dividends

EOY Noncontrolling Interests

b. Equity Income

Consol. NI attributable to NCI

Dividends

Equity investment

Noncontrolling interest

Common stock

APIC

Retained Earning

Equity investment

Noncontrolling interest

PPE, net

Patent, net

GW @ BOY

Equity investment

Noncontrolling interest

Operating expenses

PPE, Net

Patent, net

Equity investment

Noncontrolling interest @ BOY

Cost of goods sold

Sales

Cost of Goods Sold

Cost of Goods Sold

Inventory

Accounts Payable

Accounts Receivable