Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please answer B and C. Consolidation subsequent to date of acquisitionEquity method with noncontrolling interest , AAP and gain on upstream intercompany equipment sale A

Please answer B and C.

Consolidation subsequent to date of acquisitionEquity 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, 2011. 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 subsidiarys Stockholders Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiarys 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 2014, the subsidiary sold Equipment to the parent for a cash price of $250,000. The subsidiary acquired the equipment at a cost of $480,000 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 pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2016. The parent uses the equity method to account for its Equity Investment.

Parent Subsidiary Parent Subsidiary
Income statement: Balance sheet:
Sales $3,400,000 $900,000 Assets
Cost of goods sold (2,400,000) (500,000) Cash $619,500 $250,000
Gross profit 1,000,000 400,000 Accounts receivable 530,000 420,000
Income (loss) from subsidiary 85,875 Inventory 900,000 550,000
Operating expenses (522,000) (225,000) PPE, net 3,500,000 1,000,000
Net income $563,875 150,000 Equity investment 454,125
$6,003,625 $2,220,000
Statement of retained earnings:
BOY retained earnings $1,799,750 $200,000 Liabilities and stockholders equity
Net income 563,875 150,000 Accounts payable $340,000 $250,000
Other current liabilities 400,000 300,000
Dividends (100,000) (30,000) Long-term liabilities 1,500,000 1,100,000
EOY retained earnings $2,263,625 $320,000 Common stock 200,000 100,000
APIC 1,300,000 150,000
Retained earnings 2,263,625 320,000
$6,003,625 $2,220,000

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP.

Do no enter any negative answers in part a.

Unamortized Unamortized Unamortized Unamortized Unamortized Unamortized Unamortized
AAP 2011 AAP 2012 AAP 2013 AAP 2014 AAP 2015 AAP 2016 AAP
1/1/2011 Amortization 1/1/2012 Amortization 1/1/2013 Amortization 1/1/2014 Amortization 1/1/2015 Amortization 1/1/2016 Amortization 1/1/2017
Royalty agreement Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Controlling interest:
Royalty agreement Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Noncontrolling interest:
Royalty agreement Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

Answer

b. Calculate and organize the profits and losses on intercompany transactions and balances.

Use negative signs with answers that are reductions.

Downstream Upstream
AnswerDeferred intercompany profit recognized during 2016Net intercompany profit deferred at 1/1/16Net intercompany profit deferred at 12/31/16

Answer

Answer

Less: AnswerDeferred intercompany profit recognized during 2016Net intercompany profit deferred at 1/1/16Net intercompany profit deferred at 12/31/16

Answer

Answer

AnswerDeferred intercompany profit recognized during 2016Net intercompany profit deferred at 1/1/16Net intercompany profit deferred at 12/31/16

Answer

Answer

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary.

Use negative signs with answers that are reductions.

Equity investment at 1/1/16:
Common stock Answer

APIC Answer

Retained earnings Answer

AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits

Answer

Less: AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits

Answer

Answer

Equity investment at 12/31/16:
Common stock Answer

APIC Answer

Retained earnings Answer

AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits

Answer

Less: AnswerCommon stockAPICRetained earningsUnamortized AAP75% of upstream deferred intercompany profits25% of upstream deferred intercompany profits

Answer

Answer

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance A Contemporary Application Of Theory To Policy

Authors: David N Hyman

8th Edition

0324259700, 978-0324259704

More Books

Students also viewed these Finance questions