Question 1 (35 points): Assume, on January 1, 2019, a parent company acquired an 85% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $625,000 over the book value of the subsidiary's Stockholders Equity on the acquisition date. The parent assigned the excess to the following [A] assets [A] Assets Initial Fair Value Useful Life Property, plant, and equipment (PPE), net 300000 12 years 325000 10 years 625000 This acquisition resulted in no recognized goodwill. Assume the subsidiary sells inventory to the parent (upstream) which includes that inventory in products that it ultimately sells to customers outside of the controlled group. You have compiled the following data for the years ending 2021 and 2022: 2021 2072 Transfer Price for inventory sale 375,000 437,500 Cost of goods sold (275,000) 287,500) Gross profit 100,000 150,000 6 Inventory remaining Gross profit deferred 25,000 52.500 BOY receivable payable 150,000 131,250 The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsidiary report the following pre- consolidation financial statements at December 31, 2022: Parent Subsidiary Parent Subsidiary Income Statement: Balance sheet 500,000 75,000 Sales 7,500 000 1,875,000 Cash 687 500 375,000 Cost of goods sold 5,000,000) (1,250,000) Accounts receivable 062,500 500,000 Gross profit 2 500 000 625,000 Inventory 1,470,500 Income (loss) from subsidiary 140 250 Equity investment 5,000,000 2,062 500 Operating ex (1,500 000) (375.000) Property, plant, and equipment, net 8.720.500 2.012 500 Net income 1,140.250 250,000 Statement of retained earnings: Current liabilities 875,000 1 25,000 Beginning retained earnings 2,517,750 787,500 Long-term liabilities 2,500,000 500,000 Met income 1,140 250 250,000 Common stock 750,000 125.000 Dividends (312,500) (25,000) Additional Paid-in capital 1,250,000 250,000 End 3,345.500 1 012,500 Retained earnings 3,345,500 1,012 500 8,720,500 2,012,500 (This is optional ) a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest A AP and the noncontrolling interest AAP. b. Calculate and organize the profits and losses on intercompany transactions and balances. Compute the pre-consolidation Equity Investment account begining and ending balances starting with the stockholders" equity of the subsidiary! d. Reconstruct the activity in the parent's pre-consolidation Equity Investment T-account for the year of consolidation. e. Independently compute the owners equity attributable to the noncontrolling interest beginning and ending balances starting with the owners equity of the subsidiary. E Independently calculate consolidated net income, controlling interest net income and noucontrolling interest net income. 5. Complete the consolidating entries according to the C - E - A - D - I sequence and complete the consolidation worksheet
