Consolidations: Complete one of the required elements of the Comprehensive Illustration beginning on page 188. Explain the process to the class in your own words and then show us your work, worksheets, and entries. Review the work of one other student who prepared an answer on a different element of the problem.

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Comprehensive Illustration (Estimated Time: 60 to 75 Minutes) On January 1, 2017, Father Company acquired an 80 percent interest in Sun Company for $425,000. The acquisition-date fair value of the 20 percent noncontrolling interest's ownership shares was $102,500. Also as of that date, Sun reported total stockholders' equity of $400,000:$100,000 in common stock and $300,000 in retained earnings. In setting the acquisition price, Father appraised four accounts at values different from the balances reported within Sun's financial records. page 189 As of December 31,2021 , the trial balances of these two companies are as follows: Included in these figures is a $20,000 payable that Sun owes to the parent company. No goodwill impairments have occurred since the Sun Company acquisition. Required a. Determine consolidated totals for Father Company and Sun Company for the year 2021. b. Prepare worksheet entries to consolidate the trial balances of Father Company and Sun Company for the year 2021. c. Assume instead that the acquisition-date fair value of the noncontrolling interest was $104,500. What balances in the December 31, 2021, consolidated statements would change? Solution a. The consolidation of Father Company and Sun Company begins with the allocation of the subsidiary's acquisitiondate fair value as shown in Exhibit 4.13. Because this consolidation is taking place after several years, the unamortized balances for the various allocations at the beginning of the current year also should be determined (see Exhibit 4.14). Next, the parent's method of accounting for its subsidiary should be ascertained. The continuing presence of the original $425,000 acquisition price in the investment account indicates that Father is applying the initial value method. This same determination can be made from the Dividend Income account, which equals 80 percent of the subsidiary's dividends. Thus, Father's accounting records have ignored the increase in Sun's book value as well as the excess amortization expenses for the prior periods of ownership. These amounts have to be added to the parent's January 1, 2021, Retained Earnings account to arrive at the proper consolidated balance. During the 2017-2020 period of ownership, Sun's Retained Earnings account increased by $180,000 ($480,000 - $300,000). Father's 80 percent interest necessitates an accrual of $144,000($180,00080%) for these years. In addition, the acquisition-date fair-value allocations require the recognition of $20,800 in excess amortization expenses for this same period ($6,50080%4 years). Thus, a net increase of $123,200 ($144,000$20,800) is needed to adjust the parent's beginning retained earnings balance to reflect the equity method. Once the adjustment from the initial value method to the equity method is determined, the consolidated figures for 2021 can be calculated: Current Assets =$865,000. The parent's book value is added to the subsidiary's book value. The $20,000 intraentity balance is eliminated. Investment in Sun Company =0. The intra-entity ownership is eliminated so that the subsidiary's specific assets and liabilities can be consolidated. Land =$550,000. The parent's book value is added to the subsidiary's book value plus the $50,000 excess fairvalue allocation (see Exhibit 4.13). page 190 EXHIBIT 4.13 Excess Fair-Value Allocations EXHIBIT 4.14 Excess Fair-Value Allocation Balances Buildings ( net )=$937,500. The parent's book value is added to the subsidiary's book value plus the $20,000 fairvalue allocation (see Exhibit 4.14) and less five years of amortization (2017 through 2021). Equipment ( net) =$540,000. The parent's book value is added to the subsidiary's book value. The $12,500 fairvalue allocation has been completely amortized after five years. Royalty Agreement =$22,500. The original residual allocation from the acquisition-date fair value is recognized after taking into account five years of amortization (see Exhibit 4.13). Goodwill =$15,000. Original acquisition-date value assigned. Liabilities =$1,190,000. The parent's book value is added to the subsidiary's book value. The $20,000 intra-entity balance is eliminated. Revenues =$1,140,000. The parent's book value is added to the subsidiary's book value. Expenses =$746,500. The parent's book value is added to the subsidiary's book value plus current-year amortization expenses on the fair-value allocations (see Exhibit 4.13). Consolidated Net Income =$393,500. The combined total of consolidated revenues and expenses. Net Income Attributable to Noncontrolling Interest =$32,700. The outside owners are assigned a 20 percent share of the subsidiary's net income less excess fair-value amortizations: 20%($170,000$6,500). Net Income Attributable to Father Company =$360,800. Consolidated net income less the amount allocated to the noncontrolling interest. Common Stock =$480,000. Only the parent company's balance is reported. Retained Earnings, 1/1/21 =$827,200. Only the parent company's balance after a $123,200 increase to convert from the initial value method to the equity method. Dividends Declared =$90,000. Only parent company dividends are consolidated. Subsidiary dividends distributable to the parent are eliminated; the remainder reduce the Noncontrolling Interest balance. Retained Earnings 12/31/21 =$1,098,000. The parent's adjusted beginning balance of $827,200, plus $360,800 net income to the controlling interest, less $90,000 dividends declared by Father Company. Dividend Income = -0-. The intra-entity dividend declarations are eliminated. Noncontrolling Interest in Subsidiary, 12/31/21 $162,000. NCI in Sun's 1/1/21 book value (20%$580,000) NCI in unamortized excess fair-value allocations (20%$86,500) January 1, 2021, NCl in Sun's fair value. $116,000 NCI in Sun's net income [20%($360,000196,500)] NCl dividend share (20%$20,000) Noncontrolling interest in Sun Company, December 31, 2021 17,300133,30032,700(4,000)$162,000 b. Six worksheet entries are necessary to produce a consolidation worksheet for Father Company and Sun Company. Net Income Attributable to Noncontrolling Interest =$32,700. The outside owners are assigned a 20 percent share of the subsidiary's net income less excess fair-value amortizations: 20%($170,000$6,500). Net Income Attributable to Father Company =$360,800. Consolidated net income less the amount allocated to the noncontrolling interest. Common Stock =$480,000. Only the parent company's balance is reported. Retained Earnings, 1/1/21 =$827,200. Only the parent company's balance after a $123,200 increase to convert from the initial value method to the equity method. Dividends Declared =$90,000. Only parent company dividends are consolidated. Subsidiary dividends distributable to the parent are eliminated; the remainder reduce the Noncontrolling Interest balance. Retained Earnings 12/31/21 =$1,098,000. The parent's adjusted beginning balance of $827,200, plus $360,800 net income to the controlling interest, less $90,000 dividends declared by Father Company. Dividend Income = -0-. The intra-entity dividend declarations are eliminated. Noncontrolling Interest in Subsidiary, 12/31/21 $162,000. NCI in Sun's 1/1/21 book value (20%$580,000) NCI in unamortized excess fair-value allocations (20%$86,500) January 1, 2021, NCl in Sun's fair value. $116,000 NCI in Sun's net income [20%($360,000196,500)] NCl dividend share (20%$20,000) Noncontrolling interest in Sun Company, December 31, 2021 17,300133,30032,700(4,000)$162,000 b. Six worksheet entries are necessary to produce a consolidation worksheet for Father Company and Sun Company. If the acquisition-date fair value of the noncontrolling interest were $104,500, then Sun's fair value would increase by $2,000 to $529,500 and goodwill would increase by the same $2,000 to $17,000. The entire $2,000 increase in goodwill would be allocated to the noncontrolling interest as follows: Therefore, the consolidated balance sheet would show goodwill at $17,000 (instead of $15,000 ), and the noncontrolling interest in Sun Company balance would show $164,000 (instead of $162,000 ). Entry C- Adjusts Parent Company's Retained Earnings from Initial Value to equity method 1. Current Year Sub. Retained Earnings - Original Sub. R.E. = Increased Retained Earnings 480,000300,000=180,000 2. Retained Earnings X Interest = Accrual 180,00080%=144,000 3. Excess in Ammoritization X Interest X \# of years 6,50080%4=20,800 4. Accrual - excess ammoritization for period 144,00020,800=123,200 Entry S - "eliminate beginning stockholders' equity accounts of the subsidiary and recognize the beginning balance book value attributed to the outside owners (20%)." Entry I - Eliminate intra- entity dividends reported to parent income Dividend Income 16,000 Dividends Declared. 16,000 Entry P - Eliminate the intra-entity receivable and payable. Liabilities 20,000 Current Assets .20,000