Consolidation Working Paper, Noncontrolling Interest, Intercompany Merchandise Transactions

Kellogg Company (Kellogg's) acquired 60% of the outstanding stock of Wholesome & Hearty Foods ("Wholesome") at the end of 2007 for cash and stock totaling $192 million. Assume that Wholesome's assets and liabilities were fairly reported at the date of acquisition, except for these items:

(in thousands)	Book Value	Fair Value
Plant & Equipment, net (10-year life, straight-line)	$240,000	$216,000
Secret cookie recipe (10-year life, straight-line)	0	40,000
Long-term debt (4-year life, straight-line)	48,000	54,400

Wholesome's book value at the date of acquisition was $118.4 million, and the fair value of the 40% noncontrolling interest was $56 million. It is now December 31, 2013 (the end of the sixth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2008-2012 is $3.2 million, and impairment in 2013 is $1.6 million.

Wholesome sells merchandise and raw materials to Kellogg's at a markup of 30% on cost. Here is information on these intercompany sales (in thousands):

Inventory, January 1, 2013, reported on Kellogg's books	$16,640
Inventory, December 31, 2013, reported on Kellogg's books	20,800
Transfer price for 2013 sales from Wholesome to Kellogg's	96,000

Below are the separate trial balances of Kellogg's and Wholesome at December 31, 2013.

	Dr(Cr)
(in thousands)	Kellogg's	Wholesome
Current assets	$56,000	$32,000
Plant and equipment, net	420,240	307,200
Investment in Wholesome	204,672	--
Identifiable intangibles	160,000	16,000
Current liabilities	(48,000)	(40,000)
Long-term debt	(560,000)	(160,000)
Capital stock	(128,000)	(86,400)
Retained earnings, January 1	(91,984)	(60,800)
Sales revenue	(640,000)	(224,000)
Equity in net income of Wholesome	(1,728)	--
Cost of sales	400,000	104,000
Operating expenses	228,800	112,000
Totals	$0	$0

In your answers below, present all numbers in thousands; round answers to the nearest thousand, if applicable. (a) Calculate the initial goodwill arising from this acquisition, and its allocation to the controlling and noncontrolling interests.

Goodwill (In Thousands)

Total Goodwill =

Kellogg's Goodwill =

Goodwill to Non-Controlling Interest =

(b) Prepare a schedule computing Kellogg's equity in net income of Wholesome and noncontrolling interest in net income for 2013.

Use negative signs with answers that reduce net income amounts

(c) Prepare a working paper to consolidate the trial balances of Kellogg's and Wholesome at December 31, 2013.

Remember to use negative signs with your credit balance answers in the Consolidated Balances Dr(Cr) column.

Please answer all of A. B and C. Show work and explanations. THANK YOU!

Noncontrolling Equity in Interest net Income in net income of Wholesome of Wholesome Total $ (in thousands) Wholesome's reported net income for 2013 Revaluation writeoffs for 2013: Plant & Equipment Intangibles Goodwill Intercompany sales adjustments: Upstream beg. Inventory profit confirmed Upstream end. inventory profit unconfirmed Total $ Consolidation Working Paper Trial Balances Taken from Books Eliminations Kellogg's Wholesome Dr (Cr) Dr (Cr) Debit Credit $56,000 $32,000 420,240 307,200 (0) 204,672 Consolidated Balances Dr (Cr) (1-3) $ (in thousands) Current assets Plant and equipment, net Investment in Wholesome 160,000 Identifiable intangibles Goodwill Current liabilities Long-term debt Capital stock Retained earnings, Jan. 1 (48,000) (560,0000) (128,000) (91,984) 16,000 (R) - (R) (40,000) (160,000) (86,400) (E) (60,800) (1-2) Noncontrolling interest 22 Sales revenue Equity in Nl of Wholesome Cost of goods sold (640,000) (1,728) 400,000 (224,000) (1-1) - (C) 104,000 (1-3) (1-2) (1-1) 228,800 112,000 (0) Operating expenses Noncontrolling interest in NI Total $0 30 Noncontrolling Equity in Interest net Income in net income of Wholesome of Wholesome Total $ (in thousands) Wholesome's reported net income for 2013 Revaluation writeoffs for 2013: Plant & Equipment Intangibles Goodwill Intercompany sales adjustments: Upstream beg. Inventory profit confirmed Upstream end. inventory profit unconfirmed Total $ Consolidation Working Paper Trial Balances Taken from Books Eliminations Kellogg's Wholesome Dr (Cr) Dr (Cr) Debit Credit $56,000 $32,000 420,240 307,200 (0) 204,672 Consolidated Balances Dr (Cr) (1-3) $ (in thousands) Current assets Plant and equipment, net Investment in Wholesome 160,000 Identifiable intangibles Goodwill Current liabilities Long-term debt Capital stock Retained earnings, Jan. 1 (48,000) (560,0000) (128,000) (91,984) 16,000 (R) - (R) (40,000) (160,000) (86,400) (E) (60,800) (1-2) Noncontrolling interest 22 Sales revenue Equity in Nl of Wholesome Cost of goods sold (640,000) (1,728) 400,000 (224,000) (1-1) - (C) 104,000 (1-3) (1-2) (1-1) 228,800 112,000 (0) Operating expenses Noncontrolling interest in NI Total $0 30