Consolidation subsequent to date of acquisition - Equity method with noncontrolling interest, AAP, and upstream intercompany inventory sale

Assume that, on January 1, 2013, a parent company acquired an 80% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $430,000 over the book value of the subsidiarys Stockholders Equity on the acquisition date. The parent assigned the excess to the following [A] assets:

[A] Asset	Initial Fair Value	Useful Life (years)
Property, plant and equipment (PPE), net	$180,000	15
Patent	250,000	10
	$430,000

This acquisition resulted in no recognized goodwill. Assume that 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 2015 and 2016

	2015	2016
Transfer price for inventory sale	$200,000	$300,000
Cost of goods sold	(140,000)	(200,000)
Gross profit	$60,000	$100,000
% inventory remaining	25%	35%
Gross profit deferred	$15,000	$35,000
EOY receivable/payable	$80,000	$90,000

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, 2016:

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$6,500,000	$1,200,000		Cash	$450,000	$50,000
Cost of goods sold	(4,500,000)	(750,000)		Accounts receivable	250,000	300,000
Gross profit	2,000,000	450,000		Inventory	650,000	400,000
Income (loss) from subsidiary	74,400			Equity investment	1,021,600
Operating expenses	(1,200,000)	(300,000)		Property, plant and equipment (PPE), net	5,000,000	650,000
Net income	$874,400	150,000			$7,371,600	$1,400,000
Statement of retained earnings:				Liabilities and stockholders equity
BOY retained earnings	$3,000,000	$600,000		Current liabilities	$600,000	$70,000
Net income	874,400	150,000		Long-term liabilities	1,559,200	300,000
Dividends	(250,000)	(20,000)		Common stock	800,000	100,000
EOY retained earnings	$3,624,400	$730,000		APIC	788,000	200,000
				Retained earnings	3,624,400	730,000
					$7,371,600	$1,400,000

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP.

Do not enter any answers as negative numbers in part a.

	Unamortized		Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2013	AAP	2014	AAP	2015	AAP	2016	AAP
	1/1/2013	Amortization	12/31/2013	Amortization	12/31/2014	Amortization	12/31/2015	Amortization	12/31/2016
100%
PPE, net
AnswerPatentGoodwill
Goodwill
80%
PPE, net
AnswerPatentGoodwill
Goodwill
20%
PPE, net
AnswerPatentGoodwill
Goodwill

b. Calculate and organize the profits and losses on intercompany transactions and balances.

Downstream	Upstream
Intercompany profit on 1/1/16
Intercompany profit on 12/31/16

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders equity of the subsidiary.

Round answers to the nearest whole number. Use negative signs with answers that are deductions.

Equity investment at 1/1/16:
80% x book value of the net assets of subsidiary
Add:
Less:
Equity investment at 12/31/16:
80% x book value of the net assets of subsidiary
Add:
Less:

d. Reconstruct the activity in the parents pre-consolidation Equity Investment T-account for the year of consolidation.

Round answers to the nearest whole number.

Equity Investment
Equity Investmentat 1/1/16
Net income			Dividends
			AAP amortization
Equity Investment at 12/31/16

e. Independently compute the owners equity attributable to the noncontrolling interest beginning and ending balances starting with the owners equity of the subsidiary.

Round answers to the nearest whole number. Use negative signs with answers that are deductions.

Noncontrolling interest at 1/1/16:
20% of book value of the net assets of subsidiary
Add:
Less:
Noncontrolling interest at 12/31/16:
20% of book value of the net assets of subsidiary
Add:
Less:

f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income.

Round answers to the nearest whole number. Use negative signs with answers that are deductions.

Consolidated:
Parent's stand-alone net income
Subsidiary's stand-alone net income
Plus:
Less:
Less: 100% AAP amortization
Consolidated net income
Parent's stand-alone net income
80% Subsidiary's stand-alone net income
Plus:
Less: Less: 80% AAP amortization Consolidated net income attributable to the controlling interest 20% of subsidiary's stand-alone net income Plus: Less:
Less: 20% AAP amortization
Consolidated net income attributable to the noncontrolling interest

g. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet.

Round answers to the nearest whole number.

[C]Equity income

Dividends

Equity investment

Consolidated net income attributable to noncontrolling interest

[E]Common stock

APICA

Retained earnings

Equity investment

Consolidated net income attributable to noncontrolling interest

[A]PPE, net

Patent

Equity investment

Consolidated net income attributable to noncontrolling interest

[D]

PPE, net

[Icogs]Equity investment

[Isales]

[Icogs]

[Ipay]