Consolidation Working Paper, Noncontrolling Interest, Intercompany Merchandise Transactions

Kellogg Company (Kellogg's) acquired 75% of the outstanding stock of Wholesome & Hearty Foods ("Wholesome") at the end of 2007 for cash and stock totaling $120 million. Assume that Wholesome's assets and liabilities were fairly reported at the date of acquisition, except for these items:

Plant & Equipment, net (10-year life, straight-line)	$150,000	$135,000
Veggie Burger recipe (10-year life, straight-line)	0	25,000
Long-term debt (4-year life, straight-line)	30,000	34,000

Wholesome's book value at the date of acquisition was $74 million, and the fair value of the 25% noncontrolling interest was $35 million. It is now December 31, 2016 (the end of the ninth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2008-2015 is $2 million, and impairment in 2016 is $1 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, 2016, reported on Kellogg's books	$10,400
Inventory, December 31, 2016, reported on Kellogg's books	13,000
Transfer price for 2016 sales from Wholesome to Kellogg's	60,000

Below are the separate trial balances of Kellogg's and Wholesome at December 31, 2016.

Current assets	$35,000	$20,000
Plant and equipment, net	262,650	192,000
Investment in Wholesome	128,850	--
Identifiable intangibles	100,000	10,000
Current liabilities	(30,000)	(25,000)
Long-term debt	(350,000)	(100,000)
Capital stock	(80,000)	(54,000)
Retained earnings, January 1	(57,750)	(38,000)
Sales revenue	(400,000)	(140,000)
Equity in net income of Wholesome	(1,750)	--
Cost of sales	250,000	65,000
Operating expenses	143,000	70,000
Totals	$0	$0

Required (a) Calculate the initial goodwill arising from this acquisition, and its allocation to the controlling and noncontrolling interests.

When appropriate, use negative signs with your revaluation answers (left column only). Do not use negative signs with your answers in the right column.

Acquisition cost		$Answer
Fair value of noncontrolling interest		Answer
Total fair value		$Answer
Book value of Wholesome	$Answer
Revaluations:
Plant and equipment, net	Answer
Intangibles	Answer
Long-term debt	Answer	Answer
Goodwill		$Answer

Total goodwill	$Answer
Kellogg's goodwill	Answer
Goodwill to noncontrolling interest	$Answer

(b) Prepare a schedule computing Kellogg's equity in net income of Wholesome and noncontrolling interest in net income for 2016.

Use negative signs with revaluation and inventory profit answers that reduce total(s).

Wholesome's reported net income for 2016	$Answer	$Answer	$Answer
Revaluation writeoffs for 2016:
Plant & Equipment	Answer	Answer	Answer
Intangibles	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer
Intercompany sales adjustments:
Upstream beg. inventory profit confirmed	Answer	Answer	Answer
Upstream end. inventory profit unconfirmed	Answer	Answer	Answer
Total	$Answer	$Answer	$Answer

(c) Prepare a working paper to consolidate the trial balances of Kellogg's and Wholesome at December 31, 2016.

Remember to use negative signs with your credit balance answersin the Consolidated Balances column.

Current assets	$35,000	$20,000			Answer	(I-3)	$Answer
Plant and equipment, net	262,650	192,000	(O)	Answer	Answer	(R)	Answer
Investment in Wholesome	128,850	-			Answer	(C)	Answer
					Answer	(E)
					Answer	(R)
Identifiable intangibles	100,000	10,000	(R)	Answer	Answer	(O)	Answer
Goodwill	-	-	(R)	Answer	Answer	(O)	Answer
Current liabilities	(30,000)	(25,000)					Answer
Long-term debt	(350,000)	(100,000)					Answer
Capital stock	(80,000)	(54,000)	(E)	Answer			Answer
Retained earnings, Jan. 1	(57,750)	(38,000)	(I-2)	Answer			Answer
			(E)	Answer
Noncontrolling interest	-	-			Answer	(E)	Answer
					Answer	(R)
					Answer	(N)
Sales revenue	(400,000)	(140,000)	(I-1)	Answer			Answer
Equity in NI of Wholesome	(1,750)	-	(C)	Answer	Answer		Answer
Cost of goods sold	250,000	65,000	(I-3)	Answer	Answer	(I-2)	Answer
					Answer	(I-1)
Operating expenses	143,000	70,000	(O)	Answer			Answer
Noncontrolling interest in NI	-	-	(N)	Answer	-		Answer
Total	$0	$0		$Answer	$Answer		$Answer