Question

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

Assume that, on January 1, 2010, a parent company acquired a 75% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $550,000 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] Asset	Initial Fair Value	Useful Life
Patent	$200,000	10 years
Goodwill	350,000	Indefinite
	$550,000

75% of the Goodwill is allocated to the parent. 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 as of 2015 and 2016:

	2015	2016
Transfer price for inventory sale	$600,000	$700,000
Cost of goods sold	(500,000)	(580,000)
Gross profit	$100,000	$120,000
% Inventory remaining	25%	35%
Gross profit deferred	$25,000	$42,000
EOY receivable/payable	$70,000	$120,000

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	$6,700,000	$2,500,000		Cash	$600,000	$400,000
Cost of goods sold	(4,500,000)	(1,500,000)		Accounts receivable	800,000	600,000
Gross profit	2,200,000	1,000,000		Inventory	1,000,000	800,000
Income (loss) from subsidiary	122,250			Equity investment	1,401,000
Operating expenses	(2,000,000)	(800,000)		Property, plant and equipment (PPE), net	3,700,000	1,000,000
Net income	$322,250	$200,000			$7,501,000	$2,800,000
Statement of retained earnings:
BOY retained earnings	$2,000,000	$1,000,000		Current liabilities	$878,750	$500,000
Net income	322,250	200,000		Long-term liabilities	3,000,000	800,000
Dividends	(200,000)	(40,000)		Common stock	500,000	140,000
EOY retained earnings	$2,122,250	$1,160,000		APIC	1,000,000	200,000
				Retained earnings	2,122,250	1,160,000
					$7,501,000	$2,800,000

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

	Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2010	AAP	2011	AAP	2012	AAP	2013
	1/1/2010	Amortization	12/31/2010	Amortization	12/31/2011	Amortization	12/31/2012	Amortization
100%
Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
75%
Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
25%
Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer

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

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

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

Equity investment at 1/1/16:
75% x book value of the net assets of subsidiary	Answer
Add: Answer	Answer
Less: Answer	Answer
	Answer
Equity investment at 12/31/16:
75% x book value of the net assets of subsidiary	Answer
Add: Answer	Answer
Less: Answer	Answer
	Answer

d.  Reconstruct the activity in the parent’s pre-consolidation Equity Investment T-account for the year of consolidation.

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

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

Noncontrolling interest at 1/1/16:
25% of book value of the net assets of subsidiary		Answer
Add: Answer		Answer
Less:	Answer	Answer
		Answer
Noncontrolling interest at 12/31/16:
25% of book value of the net assets of subsidiary		Answer
Add: Answer		Answer
Less:	Answer	Answer
		Answer

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

Parent's stand-alone net income	Answer
Subsidiary's stand-alone net income	Answer
Plus: Answer	Answer
Less: Answer	Answer
Less: 100% AAP amortization	Answer
Consolidated net income	Answer
Parent's stand-alone net income	Answer
75% Subsidiary's stand-alone net income	Answer
Plus: Answer	Answer
Less: Answer	Answer
Less: 75% AAP amortization	Answer
Consolidated net income attributable to the controlling interest	Answer
25% of subsidiary's stand-alone net income	Answer
Plus: Answer	Answer
Less: Answer	Answer
Less: 25% AAP amortization	Answer
Consolidated net income attributable to the noncontrolling interest	Answer

g. Complete the consolidating entries according to the C-E-A-D-I sequence.

Consolidation Worksheet
Description		Debit	Credit
[C]	Equity income	Answer	Answer
	Answer	Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
	Answer	Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	Answer	Answer	Answer
	Equity investment	Answer	Answer
	Answer	Answer	Answer
[A]	Patent	Answer	Answer
	Answer	Answer	Answer
	Equity investment	Answer	Answer
	Answer	Answer	Answer
[D]	Answer	Answer	Answer
	Answer	Answer	Answer
[Icogs]	Equity investment	Answer	Answer
	Answer	Answer	Answer
	Answer	Answer	Answer
[Isales]	Answer	Answer	Answer
	Answer	Answer	Answer
[Icogs]	Answer	Answer	Answer
	Answer	Answer	Answer
[Ipay]	Answer	Answer	Answer
	Answer	Answer	Answer

Answer 1

a		Unamortized AAP 1/1/2010	2010 Amortization	Unamortized AAP    31/12/2010	2011 Amortization	Unamortized AAP   31/12/2011	2012 Amortization	Unamortized AAP       31/12/2012	2013 Amortization	Unamortized AAP 31/12/2013
	100% AAP
	Patent	200,000	20,000	180,000	20,000	160,000	20,000	140,000	20,000	120,000
	Goodwill	350,000		350,000		350,000		350,000		350,000
		550,000	20,000	530,000	20,000	510,000	20,000	490,000	20,000	470,000
	Parent (75%)
	Patent	150,000	15,000	135,000	15,000	120,000	15,000	105,000	15,000	90,000
	Goodwill	262,500	0	262,500	0	262,500	0	262,500	0	262,500
		412,500	15,000	397,500	15,000	382,500	15,000	367,500	15,000	352,500
	Subsidiary (25%)
	Patent	50,000	5,000	45,000	5,000	40,000	5,000	35,000	5,000	30,000
	Goodwill	87,500	0	87,500	0	87,500	0	87,500	0	87,500
		137,500	5,000	132,500	5,000	127,500	5,000	122,500	5,000	117,500
b	Calculate and organise the profits and losses on intercompany transactions and balances
		Downstream	Upstream
	Intercompany profit on 1/1/16		$25,000
	Intercompany profit on 31/12/16		$42,000
c	Pre-consolidation Equity Investment account beginning and ending balances
	Equity Investment at 1/1/16
	75% x book value of the net assets of subsidiary	$1,005,000
	Unamortized AAP	$322,500
	Unrealized profit on intercompany sales	$18,750
		$1,308,750
	Equity investment at 31/12/16
	75% x book value of the net assets of subsidiary	$1,125,000
	Unamortized AAP	$307,500
	Unrealized profit on intercompany sales	$31,500
		$1,401,000
	Book value at 1/1/16
	Common Stock	140000
	APIC	200000
	Retained earnings	1000000
	Total	1340000
	75% of book value	1005000
	Book value at 31/12/16
	Common Stock	140000
	APIC	200000
	Retained earnings	1160000
	Total	1500000
	75% of book value	1125000
d	The activity in the parent's pre-consolidation Equity investment t-account
	Equity Investment
	Balance at 1/1/16	$1,308,750	$30,000	Dividend
	Net income	$150,000	$15,000	AAP amortization
	Realized profit on intercompany sales	$18,750	$31,500	Unrealized profit
	Balance at 31/12/16	$1,401,000
e	The owner's equity attributable to the noncontrolling interest beginning and ending balances
	Non-controlling interest at 1/1/16
	25% x book value of the net assets of subsidiary	$335,000
	Unamortized AAP	$107,500
	Unrealized profit on intercompany sales	$6,250
		$436,250
	Non-controlling interest at 31/12/16
	25% x book value of the net assets of subsidiary	$375,000
	Unamortized AAP	$102,500
	Unrealized profit on intercompany sales	$10,500
		$467,000
f	Consolidated net income, controlling interest net income, noncontrolling interest net income
	Consolidated:
	Parent's stand alone net income	$200,000	(322250-122250)
	Subsidiary stand alone net income	$200,000
	Add: Realized profit on intercompany sales	$25,000
	Less: Unrealized profit on intercompany sales	$42,000
	Less: 100% AAP amortization	$20,000
	Consolidated net income	$363,000
	Parent:
	Parent's stand alone net income	$200,000
	75% of subsidiary's stand alone net income	$150,000
	Add: Realized profit on intercompany sales	$18,750
	Less: Unrealized profit on intercompany sales	$31,500
	Less: 75% AAP amortization	$15,000
	Consolidated net income attributable to the controlling interest	$322,250
	Subsidiary:
	25% of subsidiary's stand alone net income	$50,000
	Add: Realized profit on intercompany sales	$6,250
	Less: Unrealized profit on intercompany sales	$10,500
	Less: 25% AAP amortization	$5,000
	Consolidated net income attributable to the noncontrolling interest	$40,750
	Consolidated Worksheet
C	Equity Income	$122,250
	Consolidated net income attributable to the noncontrolling interest	$40,750
	Dividend		$40,000
	Equity Investment		$92,250
	Noncontrolling Interest		$30,750
E	Common Stock	$140,000
	APIC	$200,000
	Retained Earnings	$1,160,000
	Equity Investment		$1,125,000
	Noncontrolling interest		$375,000
A	Patent	$80,000
	Goodwill	$350,000
	Equity Investment		$322,500
	Noncontrolling interest		$107,500
D	Amortization expense	$20,000
	Patent		$20,000