Problem Parent Co. acquired 80% of the outstanding stock of Sub Co. on 1/1/15 for a purchase price that was equal to 80% of the total fair value of the Sub Co. The total fair value of the Sub Co. on 1/1/15 was $350,000 over the book value of the net ets of the Sub Co. on that date. Parent uses the equity method to account for its investment in Sub Co. At 1/1/15, Sub's identifiable net assets had book values equal to fair values except for the following Book value Item Fair value Useful Life (Years) Internally Developed Patent 10 200,000 Sub routinely sells merchandise inventory to Parent, which Parent includes in products that it ultimately sells to customers outside of the affiliated companies. Assume inventory costing by FIFO for both companies. Following are data related to intercompany inventory sales for fiscal years 2020 and 2021: 2020 2021 Transfer price for inventory sale Cost of goods sold Gross profit % inventory remainin $ 305,500 (269,500) 36,000 25% 356,500 3 16,500 40,000 35% EOY Receivable/Payable $55,000 65,000 Inventory not remaining at the end of each year was sold outside of the affiliated companies Following the list of required deliverables are the financial statements for Parent and Sub at 12/31/21. Note: Any existing goodwill with respect to Sub Co. has been tested for impairment annually and is not impaired REQUIRED: Generate the Acquisition Accounting Premium schedule at acquisition. (Begin schedule at AAP.) through 2021 upstream or downstream. Calculate any gains or losses to be deferred or recognized 1. 2. Build a schedule demonstrating any depreciation or amortization necessary due to AAP for years from acquisition 3. Organize and document all intercompany transactions discussed in the problem. Determine/state if they 4. Reconstruct the 1/1/21 balance of the Equity Investment T account on the books of the parent. 5. 6. 7. Journalize and label the equity method entries that would have been journalized and posted on the books of the parent in 2021 Post equity method entries to the Equity Investment T account on the books of the parent, reconstructing the balance as of 12/31/21. Post equity method entries to the Income from Sub T account on the books of the parent, reconstructing the balance as of 12/31/21 Independently calculate the Consolidated Net Income Attributable to NCI, the 1/1/21 NCI balance, and the 12/31/21 NCI balance Generate and complete the consolidation spreadsheet generating consolidated financial statements at 12/31 Use the C-E-A-D-I pneumonic to identify each entry on the spreadsheet. Be sure you understand (in short phrases) what each entry is doing...its purpose 8. 9. 10. To assist me in visualizing your consolidation spreadsheet entries, please prepare them in journal entry format on a separate sheet (separate from the consolidation spreadsheet). Be sure each entry is labeled relative to the C-E A-D-I pneumonic. Financial statements as of 12/31/21: Income Statement Sub $1,160,000 (687,500) 472,500 Parent $5,660,000 3,830,000) 1,830,000 185,600 (1,045,200) S 970,400 Sales Cost of goods sold Gross Profit income (loss) from subsidiary Operating expenses Net income (215,500) $ 257,000 Statement of Retained Earnings Sub $2,385,000 257,000 (25,000) Parent $6,464,800 970,400 (105,400 BOY Retained Earnings Net income Dividends EOY Retained Earnings $2,617,000 $7.329,800 Balance Sheet Parent Sub Assets: Cash Accounts receivable Inventory Equity Investment PPE, net 474,200 702,700 622,900 $ 978,400 1,142,300 1,515,400 2,571,200 5,934 800 $12,142,100 1,802,300 $3,602,100 Liabilities and Stockholders' Equity: Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings $ 689,700 2,054,000 853,600 1,215,000 7,329,800 $204,600 379,500 92,100 308,900 2,617,000 $3,602,100 $12,142,100 Problem Parent Co. acquired 80% of the outstanding stock of Sub Co. on 1/1/15 for a purchase price that was equal to 80% of the total fair value of the Sub Co. The total fair value of the Sub Co. on 1/1/15 was $350,000 over the book value of the net ets of the Sub Co. on that date. Parent uses the equity method to account for its investment in Sub Co. At 1/1/15, Sub's identifiable net assets had book values equal to fair values except for the following Book value Item Fair value Useful Life (Years) Internally Developed Patent 10 200,000 Sub routinely sells merchandise inventory to Parent, which Parent includes in products that it ultimately sells to customers outside of the affiliated companies. Assume inventory costing by FIFO for both companies. Following are data related to intercompany inventory sales for fiscal years 2020 and 2021: 2020 2021 Transfer price for inventory sale Cost of goods sold Gross profit % inventory remainin $ 305,500 (269,500) 36,000 25% 356,500 3 16,500 40,000 35% EOY Receivable/Payable $55,000 65,000 Inventory not remaining at the end of each year was sold outside of the affiliated companies Following the list of required deliverables are the financial statements for Parent and Sub at 12/31/21. Note: Any existing goodwill with respect to Sub Co. has been tested for impairment annually and is not impaired REQUIRED: Generate the Acquisition Accounting Premium schedule at acquisition. (Begin schedule at AAP.) through 2021 upstream or downstream. Calculate any gains or losses to be deferred or recognized 1. 2. Build a schedule demonstrating any depreciation or amortization necessary due to AAP for years from acquisition 3. Organize and document all intercompany transactions discussed in the problem. Determine/state if they 4. Reconstruct the 1/1/21 balance of the Equity Investment T account on the books of the parent. 5. 6. 7. Journalize and label the equity method entries that would have been journalized and posted on the books of the parent in 2021 Post equity method entries to the Equity Investment T account on the books of the parent, reconstructing the balance as of 12/31/21. Post equity method entries to the Income from Sub T account on the books of the parent, reconstructing the balance as of 12/31/21 Independently calculate the Consolidated Net Income Attributable to NCI, the 1/1/21 NCI balance, and the 12/31/21 NCI balance Generate and complete the consolidation spreadsheet generating consolidated financial statements at 12/31 Use the C-E-A-D-I pneumonic to identify each entry on the spreadsheet. Be sure you understand (in short phrases) what each entry is doing...its purpose 8. 9. 10. To assist me in visualizing your consolidation spreadsheet entries, please prepare them in journal entry format on a separate sheet (separate from the consolidation spreadsheet). Be sure each entry is labeled relative to the C-E A-D-I pneumonic. Financial statements as of 12/31/21: Income Statement Sub $1,160,000 (687,500) 472,500 Parent $5,660,000 3,830,000) 1,830,000 185,600 (1,045,200) S 970,400 Sales Cost of goods sold Gross Profit income (loss) from subsidiary Operating expenses Net income (215,500) $ 257,000 Statement of Retained Earnings Sub $2,385,000 257,000 (25,000) Parent $6,464,800 970,400 (105,400 BOY Retained Earnings Net income Dividends EOY Retained Earnings $2,617,000 $7.329,800 Balance Sheet Parent Sub Assets: Cash Accounts receivable Inventory Equity Investment PPE, net 474,200 702,700 622,900 $ 978,400 1,142,300 1,515,400 2,571,200 5,934 800 $12,142,100 1,802,300 $3,602,100 Liabilities and Stockholders' Equity: Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings $ 689,700 2,054,000 853,600 1,215,000 7,329,800 $204,600 379,500 92,100 308,900 2,617,000 $3,602,100 $12,142,100