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Consolidation subsequent to date of acquisition-Equity 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, 2008. 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 subsidiary's Stockholders' Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary's 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 2011, the subsidiary sold Equipment to the parent for a cash price of $245,000. The subsidiary acquired the equipment at a cost of $480000 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 financial statements of the parent and its subsidiary for the year ended December 31, 2013. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Balance sheet: Sales $3,380,000 $876,000 Assets Cost of goods sold (2,433,600) (525,600) Cash 5684,595 $243,272 Gross profit 946,400 350.400 Accounts receivable 591,500 376,680 Income (loss) from subsidiary 54,418 Inventory 878,800 481,800 Operating expenses (507,000) (227.760) PPE, net 3,400,280 902,280 $503,818 122,540 Equity investment 437,531 $5,992.706 $2,004,032 Statement of retained earnings: BOY retained earnings $1,812,627 $197,100 Liabilities and stockholders' equity 503,818 122,640 Accounts payable $341,380 5155928 Dividends (112,471) (17,520) Other current liabilities 402,220 201,480 EOY retained earnings $2,203,974 S302,220 Long-term liabilities 1,500,000 1.100,000 186,914 108,624 1,358,218 135,780 Retained earnings 2,203,974 302,220 $5,992,706 $2,004,032 Net income Net income Common stock APIC MILY TUF le 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. Do not use negative signs with your answers in part a. Unamortized Unamortized Unamortized Unamortized Unamortized 2008 2009 AAP 2010 2011 AAP 201 1/1/2008 Amortization 1/1/2009 Amortization 1/1/2010 Amortization 1/1/2011 Amortization 1/1/2012 Amorti Royalty agreement 350,000 50,000 300,000 50,000 250,000 50,000 200,000 150,000 50,000 11 Controlling interest Royalty agreement 262,500 37,500 225,000 37,500 187 500 37,500 150,000 37.500 112,500 Noncontrolling interest: Royalty agreement 87.500 12,500 75,000 12,500 62,500 12,500 50,000 12.500 37.500 b. Calculate and organize the profits and losses on intercompany transactions and balances. Use negative signs with answers that are reductions. Downstream Upstream Net intercompany profit deferred at 1/1/13 245,000 Less: Deferred intercompany profit recognized during 2013 0 183,750 Net intercompany profit deferred at 12/31/13 0 61,250 0 c Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity oft Use negative signs with answers that are deductions. Equity investment at 1/1/13: Common stock 81,468 APIC 101,835 Retained earnings 147,825 Unamortized AAP 75,000 Less: 75% of upstream deferred intercompany profits - 0 0 81,468 101,835 Equity Investment at 12/31/13: Common stock APIC Retained earnings Unamortized AAP Less: 75% of upstream deferred intercompany profits - 226,665 37.500 0 0 0 d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation. Equity Investment Balance at 1/1/13 0 Net income 0 Dividends Upstream equipment 0 AAP amortization Balance at 12/31/13 0 0 0 0 e. Independently compute the owners' equity attributable to the noncontrolling interest beginning and ending balances starting we equity of the subsidiary. Use negative signs with answers that are reductions, Noncontrolling interest at 1/1/13: Common stock 0 APIC 0 0 Retained earnings Unamortized AAP Less: 2596 of upstream deferred intercompany profits 25,000 0 0 Noncontrolling interest at 12/31/13: Common stock 0 APIC 0 Retained earnings 0 12,500 Unamortized AAP Less: 25% of upstream deferred intercompany profits 0 9 0 Consolidation subsequent to date of acquisition-Equity 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, 2008. 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 subsidiary's Stockholders' Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary's 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 2011, the subsidiary sold Equipment to the parent for a cash price of $245,000. The subsidiary acquired the equipment at a cost of $480000 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 financial statements of the parent and its subsidiary for the year ended December 31, 2013. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Balance sheet: Sales $3,380,000 $876,000 Assets Cost of goods sold (2,433,600) (525,600) Cash 5684,595 $243,272 Gross profit 946,400 350.400 Accounts receivable 591,500 376,680 Income (loss) from subsidiary 54,418 Inventory 878,800 481,800 Operating expenses (507,000) (227.760) PPE, net 3,400,280 902,280 $503,818 122,540 Equity investment 437,531 $5,992.706 $2,004,032 Statement of retained earnings: BOY retained earnings $1,812,627 $197,100 Liabilities and stockholders' equity 503,818 122,640 Accounts payable $341,380 5155928 Dividends (112,471) (17,520) Other current liabilities 402,220 201,480 EOY retained earnings $2,203,974 S302,220 Long-term liabilities 1,500,000 1.100,000 186,914 108,624 1,358,218 135,780 Retained earnings 2,203,974 302,220 $5,992,706 $2,004,032 Net income Net income Common stock APIC MILY TUF le 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. Do not use negative signs with your answers in part a. Unamortized Unamortized Unamortized Unamortized Unamortized 2008 2009 AAP 2010 2011 AAP 201 1/1/2008 Amortization 1/1/2009 Amortization 1/1/2010 Amortization 1/1/2011 Amortization 1/1/2012 Amorti Royalty agreement 350,000 50,000 300,000 50,000 250,000 50,000 200,000 150,000 50,000 11 Controlling interest Royalty agreement 262,500 37,500 225,000 37,500 187 500 37,500 150,000 37.500 112,500 Noncontrolling interest: Royalty agreement 87.500 12,500 75,000 12,500 62,500 12,500 50,000 12.500 37.500 b. Calculate and organize the profits and losses on intercompany transactions and balances. Use negative signs with answers that are reductions. Downstream Upstream Net intercompany profit deferred at 1/1/13 245,000 Less: Deferred intercompany profit recognized during 2013 0 183,750 Net intercompany profit deferred at 12/31/13 0 61,250 0 c Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity of the c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders' equity oft Use negative signs with answers that are deductions. Equity investment at 1/1/13: Common stock 81,468 APIC 101,835 Retained earnings 147,825 Unamortized AAP 75,000 Less: 75% of upstream deferred intercompany profits - 0 0 81,468 101,835 Equity Investment at 12/31/13: Common stock APIC Retained earnings Unamortized AAP Less: 75% of upstream deferred intercompany profits - 226,665 37.500 0 0 0 d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation. Equity Investment Balance at 1/1/13 0 Net income 0 Dividends Upstream equipment 0 AAP amortization Balance at 12/31/13 0 0 0 0 e. Independently compute the owners' equity attributable to the noncontrolling interest beginning and ending balances starting we equity of the subsidiary. Use negative signs with answers that are reductions, Noncontrolling interest at 1/1/13: Common stock 0 APIC 0 0 Retained earnings Unamortized AAP Less: 2596 of upstream deferred intercompany profits 25,000 0 0 Noncontrolling interest at 12/31/13: Common stock 0 APIC 0 Retained earnings 0 12,500 Unamortized AAP Less: 25% of upstream deferred intercompany profits 0 9 0