Question
In: Accounting
On January 1, 2019, Aspen Company acquired 80 percent of Birch Company's voting stock for $482,000....
On January 1, 2019, Aspen Company acquired 80 percent of Birch Company's voting stock for $482,000. Birch reported a $542,500 book value, and the fair value of the noncontrolling interest was $120,500 on that date. Then, on January 1, 2020, Birch acquired 80 percent of Cedar Company for $144,000 when Cedar had a $150,000 book value and the 20 percent noncontrolling interest was valued at $36,000. In each acquisition, the subsidiary's excess acquisition-date fair over book value was assigned to a trade name with a 30-year remaining life.
These companies report the following financial information. Investment income figures are not included.
| 2019 | 2020 | 2021 | ||||
| Sales: | ||||||
| Aspen Company | $ | 595,000 | $ | 767,500 | $ | 907,500 |
| Birch Company | 285,250 | 290,250 | 551,800 | |||
| Cedar Company | Not available | 172,500 | 276,200 | |||
| Expenses: | ||||||
| Aspen Company | $ | 475,000 | $ | 452,500 | $ | 547,500 |
| Birch Company | 230,000 | 230,000 | 482,500 | |||
| Cedar Company | Not available | 157,000 | 228,000 | |||
| Dividends declared: | ||||||
| Aspen Company | $ | 20,000 | $ | 30,000 | $ | 40,000 |
| Birch Company | 15,000 | 18,000 | 18,000 | |||
| Cedar Company | Not available | 4,000 | 12,000 | |||
Assume that each of the following questions is independent:
-
If all companies use the equity method for internal reporting purposes, what is the December 31, 2020, balance in Aspen's Investment in Birch Company account?
-
What is the consolidated net income for this business combination for 2021?
-
What is the net income attributable to the noncontrolling interest in 2021?
-
Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following intra-entity gross profits in inventory at the end of each year:
| Date | Amount |
| 12/31/19 | $16,000 |
| 12/31/20 | 23,200 |
| 12/31/21 | 25,600 |
What is the accrual-based net income of Birch in 2020 and 2021, respectively?
Solutions
Expert Solution
SOLUTION:
Calculation of Annual Amortization for both companies:
Annual Amortization (Birch Company)
| Particulars | Amount |
| Consideration Transferred (Aspen Company) (A) | 482000 |
| Add: Non Controlling Interest fair value (B) | 120500 |
| Birch company's fair value (C= A+B) | 602500 |
| Less: Book Value (D) | 542500 |
| Trade Name (E=C-D) | 60000 |
| Life (F) | 30 |
| Annual Amortization (G=E/F) | 2000 |
Annual Amortization (Cedar Company)
| Particulars | Amount |
| Consideration Transferred (Birch Company) (A) | 144000 |
| Add: Non Controlling Interest fair value (B) | 36000 |
| Birch company's fair value (C= A+B) | 180000 |
| Less: Book Value (D) | 150000 |
| Trade Name (E=C-D) | 30000 |
| Life (F) | 30 |
| Annual Amortization (G=E/F) | 1000 |
a. Equity Method of Reporting:
Aspen Company's Investment
| Particulars | Amount | Amount | |
| Investment in Birch Company | 482000 | ||
| Reported Income of Birch Company (2019) | 55250 | (285250-230000) | |
| Less: Amortization Expense | 2000 | ||
| Net Income for year 2019 | 53250 | ||
| Aspen Company's Ownership | 80% | ||
| Equity Balance - 2019 (53250*80%) | 42600 | ||
| Less: Dividend Received (15000*80%) | 12000 | ||
| Reported Income of Birch Company (2020) | 60250 | (290250-230000 | |
| Less: Amortization Expense | 2000 | ||
| Net Income for year 2020 | 58250 | ||
| Aspen Company's Ownership | 80% | ||
| Equity Balance - 2020 | 46600 | ||
| Less: Dividend Received (18000*80%) | 14400 | ||
| Investment Balance as on 31st Dec 2020 | 544800 |
The investment balance as on 31st December, 2020 was $ 544800
b. Consolidated Net Income for the year 2021
| Particulars | Amount | Amount |
| Sales | ||
| Aspen | 907500 | |
| Birch | 551800 | |
| Cedar | 276200 | 1735500 |
| Expenses | ||
| Aspen | 547500 | |
| Birch | 482500 | |
| Cedar | 228000 | 1258000 |
| Total Amortization Expense | ||
| Birch | 2000 | |
| Cedar | 1000 | 3000 |
| Consolidated Net Income for 2021 | 474500 |
c. Net Income attributable to Non-controlling Interest for the year 2021
| Particulars | Amount | Amount |
| Net Income Attributable to NCI of Birch Co | ||
| Sales | 551800 | |
| Less: Expenses | 482500 | |
| Net Income | 69300 | |
| Outside Ownership | 20% | |
| Non Controlling Interest (69300*20%) | 13860 | |
| Net Income Attributable to NCI of Cedar Co | ||
| Sales | 276200 | |
| Less: Expenses | 228000 | |
| Net Income | 48200 | |
| Outside Ownership | 20% | |
| Non Controlling Interest (48200*20%) | 9640 | |
| Total Net Income Attribuatable to NCI for 2021 | 23500 |
d. Realized income of Company B for 2020 and 2021 is calculated below
| Particulars | Amount |
| 2020 Realized Income (as in part a) | 58250 |
| Add: 2019 transfer gain recognized in 2020 | 16000 |
| Less: Transfer gain to be recognized in 2021 | 23200 |
| Realized Income of Birch in 2020 | 51050 |
| 2021 Realized Income (Note below) | 105060 |
| Add: 2020 transfer gain recognized in 2021 | 23200 |
| Less: Transfer gain to be recognized in 2022 | 25600 |
| Realized Income of Birch in 2021 |
102660 |
Note:
| Particulars | Amount |
| Net Income | |
| Sales | 551800 |
| Less: Expenses | 482500 |
| Net Income | 69300 |
| Less: Excess Amortization | 2000 |
| Add: Equity in Aspen (276200-228000=(48200-1000)*80% | 37760 |
| Realized Income of Birch for 2021 | 105060 |
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