Please explain the highlighted portions below.
The Royalty Agreement journal entry is for $100,000. Is this because there are 2 years @ $50,000 left of the original 7 year remaining economic life?
The credit to Buildings & Equipment, net BOY is for $29,000. I understand that it's 2 years @ $14,500, is the reasoning the same as my previous question?
Any insight is greatly appreciated. Thanks.
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, 2011, On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $350,ooo 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 Goodll. 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,ooo. The subsidiary acquired the equipment at a cost of $480,ooo 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 he parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Income statement: Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses Balance sheet: $3.400,000 $900,000 Assets (2.400,000) (500,000) $619,500 $250,000 530,000 420,000 900,000 550,000 3,500,000 1,000,000 Cash 1,000,000 400,000 Accounts receivable 85,875 Inventory (522,000) (225,000) PPE, net $563,875 150,000 454,125 Net income Equity investment $6,003,625 $2,220,000 Statement of retained earnings: BOY retained earnings Net income $1,799,750 $200,000 Liabilities and stockholders' equity 563,875 150,000 Accounts payable $340,000 $250,000 400,000 300,000 1,500,000 1,100,000 Other current liabilities (100,000) (30,000) Dividends Long-term liabilities $2,263,625 $320,000 EOY retained earnings Common stock 200,000 100,000 1,300,000150,000 2,263,625 320,000 APIC Retained earnings $6,003,625 $2,220,000 f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income Answers f. Parent's stand-alone net income 478,000 150,000 14,500 (50,000) 114,500 592,500 Subsidiary's stand-alone net income Plus: 100% realized upstream deferred profits Less: 100% AAP amortization Subsidiary's adjusted stand-alone net income Consolidated net income Parent's stand-alone net income 478,000 112,500 10,875 37,500 85,875 563,875 75% x subsidiary's stand-alone net income Plus: 75% realized upstream deferred profits Less: 75% AAP amortization 75% x subsidiary's adjusted stand-alone net income Consolidated net income attributable to the CI 25% x subsidiary's stand-alone net income 37,500 3,625 (12,500) 28,625 Plus: 25% realized upstream deferred profits Less: 25% AAP amortization Consolidated net income attributable to the NCI Equity Income from Subsidiary Income attributable to NCI 85,875 28,625 e.[C] Dividends - Subsidiary Investment in Subsidiary Noncontrolling Interest 30,000 63,375 21,125 Common Stock (S) @ BOY APIC Retained Earnings (S) @ BOY 100,000 150,000 200,000 Equity Investment @ BOY Noncontrolling interest @ BOY 337,500 112,500 Royalty Agreement 100,000 Equity Investment @ BOY Noncontrolling interest @ BOY 75,000 25,000 Operating Expenses 50,000 Royalty Agreement 50,000 [laiol Equity Investment @ BOY 21,750 7,250 Noncontrolling interest@ BOY Buildings & Equipment, net @ BOY 29,000 [ldepl Buildings & Equipment, net 14,500 Depreciation expense 14,500
