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Consolidation Working Paper, Noncontrolling Interest, Intercompany Merchandise Transactions Kellogg Company (Kellogg's) acquired 75 percent of the outstanding stock of Wholesome & Hearty Foods ("Wholesome") at the end of 2011, for cash and stock totaling $120 million. Wholesome's assets and liabilities were fairly reported at the date of acquisition, except for these items: (in thousands) Book Value Fair Value Plant & Equipment, net (10-year life, straight-line) $150,000 $135,000 Veggie Burger recipe (10-year life, straight-line) 0 25,000 Long-term debt (4-year life, straight-line) 30,000 34.000 Wholesome's book value at the date of acquisition was $74 million, and the fair value of the 25% noncontrolling interest was $35 million. It is now December 31, 2020 (the end of the ninth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2012-2019 is $2 million, and impairment in 2020 is $1 million. Wholesome sells merchandise and raw materials to Kellogg's at a markup of 30% on cost. Here is information on these intercompany sales (in thousands): Inventory, January 1, 2020, reported on Kellogg's books $10,400 Inventory, December 31, 2020, reported on Kellogg's books 13,000 Transfer price for 2020 sales from Wholesome to Kellogg's 60,000 Below are the separate trial balances of Kellogg's and Wholesome at December 31, 2020. (in thousands) Current assets Plant and equipment, net Investment in Wholesome Identifiable intangibles Current liabilities Long-term debt Capital stock Retained earnings, January 1 Sales revenue Equity in net income of Wholesome Cost of sales Operating expenses Totals Dr(Cr) Kellogg's Wholesome $35,000 $ $20,000 262,650 192,000 128,850 100,000 10,000 (30,000) (25,000) (350,000) (100,000) ) (80,000) (54,000) (57,750) (38,000) () (400,000) (140,000) () (1.750) 250,000 65,000 143,000 70,000 $0 $0 In your answers below, present all numbers in thousands; round answers to the nearest thousand, if applicable. Required (a) Calculate the initial goodwill arising from this acquisition, and its allocation to the controlling and noncontrolling interests. Goodwill (in thousands) Total goodwill 75,000 Kellogg's goodwill 60,000 Goodwill to noncontrolling interest $ 15,000 $ (b) Prepare a schedule computing Kellogg's equity in net income of Wholesome and noncontrolling interest in net income for 2020. Use negative signs with answers that reduce net income amounts. Noncontrolling Equity in interest net income in net income Total of Wholesome of Wholesome 5,000 $ 3,750 $ 1,250 $ (in thousands) Wholesome's reported net income for 2020 Revaluation writeoffs for 2020: Plant & Equipment Intangibles Goodwill Intercompany sales adjustments: Upstream beg. Inventory profit confirmed Upstream end. inventory profit unconfirmed Total 1,500 (2.500) (1,000) 1.125 (1,875) (800) 375 (625) (200) 2,400 600 (3,000) 2,400 $ 1,800 (2,250) 1,750 $ (750) 650 $ (c) Prepare a working paper to consolidate the trial balances of Kellogg's and Wholesome at December 31, 2020. Remember to use negative signs with your credit balance answers in the Consolidated Balances Dr(Cr) column. Consolidation Working Paper Trial Balances Taken From Books Eliminations Kellogg's Wholesome Consolidated Balances (in thousands) Dr (Cr) Dr (Cr) Debit Credit Dr (Cr) Current assets $35,000 $20,000 3,000 (1-3) $ 52,000 Plant and equipment, net 262,650 192,000 (0) 1,500 15,000 x (R) 0 x Investment in Wholesome 128,850 1,750 67,200 (E) (62,150) X (R) Identifiable intangibles 100,000 10,000 (R) (625) X 2,500 (0) 100,000 X Goodwill (R) 73,000 1,000 (0) 72,000 Current liabilities (30,000) (25,000) (55,000) Long-term debt (350,000) (100,000) (450,000) Capital stock (80,000) (54,000) (E) 54,000 (80,000) Retained earnings, Jan. 1 (57,750) (38,000) (1-2) 2,400 (60,000) X (E) 35,600 Noncontrolling interest 22,400 (E) 22,400 X (15,850) X (R) 650 (N) Sales revenue (400,000) (140,000) (1-1) 60,000 (480,000) Equity in Nl of Wholesome (1,750) (C) 1,750 0 Cost of goods sold 250,000 65,000 (1-3) 3,000 2,400 (1-2) 255,600 60,000 (1-1) Operating expenses 143,000 70,000 (0) 2,000 215,000 Noncontrolling interest in NI (N) 650 650 Total $0 $0 $ 246,400 x $ 246,400 X $ 0 Check

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