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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
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Controlling interest:
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Noncontrolling interest:
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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

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

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

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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:
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Retained earnings Answer

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

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

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Equity investment at 12/31/16:
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Retained earnings Answer

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

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

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