QUESTION 3

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, 2008. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $560,000 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 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 2011, the subsidiary sold Equipment to the parent for a cash price of $240,000. The subsidiary acquired the equipment at a cost of $480000 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 financial statements of the parent and its subsidiary for the year ended December 31, 2013. The parent uses the equity method to account for its Equity Investment. Parent Subsidiary Parent Subsidiary Balance sheet: Income statement: Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses $3,380,000 $876,000 Assets (2,433,600) (525,600) Cash $684,595 $243,272 591,500 376,680 878,800 481,800 3,400,280 902,280 946,400 350,400 Accounts receivable 50,355 Inventory (507,000) (227,760) PPE, net $489,755 122,640 Equity investment 460,968 Net income $6,016,143 $2,004,032 Statement of retained earnings: BOY retained earnings Net income $1,812,627 $197,00 Liabilities and stockholders' equity $341,380 $155,928 402,220 201,480 1,500,000 1,100,000 86,914108,624 1,381,655 135,780 2,203,974 302,220 6,016,143 $2,004,032 489,755 122,640 Accounts payabl Dividends (98,408) 7,520) Other current liabilities EOY retained earnings s2,203,974 $302,220 Long-term liabilities Common stock Retained earnings