Question

Preparing a consolidated income statement—Equity method with noncontrolling interest and AAP A parent company purchased a 65% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $750,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $450,000 and to an unrecorded patent valued at $300,000. The building asset is being depreciated over a 20-year period and the patent is being amortized over a 10-year period, both on the straight-line basis with no salvage value. During the current year, the subsidiary declared and paid $120,000 of dividends. The parent company uses the equity method of pre-consolidation investment bookkeeping. Each company reports the following income statement for the current year: Parent Subsidiary Income statement: Sales $6,000,000 $1,800,000 Cost of goods sold (4,200,000) (1,080,000) Gross profit 1,800,000 720,000 Income (loss) from subsidiary 129,675 - Operating expenses (1,140,000) (468,000) Net income $789,675 $252,000 a. Compute the Income (loss) from subsidiary of $129,675 reported by the parent company in its preconsolidation income statement. Do not use negative signs with your answers below. Subsidiary's net income Answer 252,000 AAP Answer (75,000) Adjusted subsidiary income Answer 177,000 P % of interest X Answer 65 % Income (loss) from subsidiary Answer 129,675 b. Prepare the consolidated income statement for the current year. Do not use negative signs with your answers below. Consolidated Income Statement Sales Answer 7,800,000 Cost of goods sold Answer (5,280,000) Gross profit Answer 2,520,000 Operating expenses Answer (1,683,000) Answer Net income Answer 837,000 Answer Net income attributable to noncontrolling interests Answer 61,950 Answer Net income attributable to the parent Answer 777,050

Answer 1

(a)

Particulars	Amount
Subsidiary net income	252,000
Less: Depreciation of excess value of building (450,000/20)	(22,500)
Less: Depreciation on unrecorded patent (300,000/10)	(30,000)
Adjustment subsidiary income (adjust annual profit)	199,500
Percentage of interest	65%
Income from subsidiary(199,500 *65%)	129,675

(b)

Particulars	Amount
Sales(6,000,000 + 1,800,000)	7,800,000
Cost of Goods Sold (4,200,000 + 1,080,000)	(5,280,000)
Gross Profit(1,800,000 + 720,000)	2,520,000
Operating expanses (1,140,000 + 468,000) + Depreciation (30,000 + 22,500)	(1,660,500)
Net income	859,500
Net income Attributable to Non controlling interest(35% of adjust subsidiary income calculated above 199,500 * 35%)	69,825
Net income attributable to Parent company (859,500 – 69,825)	789,675

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