Question

Preparing a consolidated income statement—Equity method with noncontrolling interest, AAP and upstream intercompany depreciable asset profits
A parent company purchased an 80% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $575,000 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 $375,000 and to an unrecorded Customer List valued at $200,000. The building asset is being depreciated over a 12-year period and the Customer List is being amortized over a 5-year period, both on the straight-line basis with no salvage value. During a previous year, the subsidiary sold to the parent company a piece of depreciable property. The unconfirmed upstream gain on this intercompany transaction was $150,000 at the beginning of the current year. The upstream gain confirmed each year is $37,500. During the current year, the subsidiary declared and paid $225,000 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	$12,000,000	$3,000,000
Cost of goods sold	(8,400,000)	(1,800,000)
Gross profit	3,600,000	1,200,000
Income (loss) from subsidiary	309,000	0
Operating expenses	(2,280,000)	(780,000)
Net income	$1,629,000	$420,000

a. Compute the Income (loss) from subsidiary of $309,000 reported by the parent company in its pre-consolidation income statement.

Do not use negative signs with your answers below.

Subsidiary's net income		Answer
AAP		Answer
Confirmed upstream gain		Answer
Adjusted subsidiary income		Answer
P % of interest	X	Answer	%
Income (loss) from subsidiary		Answer

b. Prepare the consolidated income statement for the current year.

Do not use negative signs with your answers below.

Consolidated Income Statement
Sales	Answer
Cost of goods sold	Answer
Gross profit	Answer
Operating expenses	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer

Answer 1

	Amortization expense of AAP assets
		Cost	Life	Amortization Per Yr
		[a]	[b]	[a/b]
	Building	375,000	12	31,250
	Customer List	200,000	5	40,000
		575,000		71,250
a	Subsidiary Net Income-a	420,000
	AAP(b)	71,250
	Confirmed Net Gain ©	37,500
	Adjusted Subsidiary Net Income [a-(b+c)]	311,250
	P% of Interest	80%
	Income (Loss) from subsidiary	249,000
b	WN
	Sales(12,000,000+3,000,000)	15,000,000
	Cost of Goods Sold(8,400,000+1,800,000)	10,200,000
	Operating Expenses	4,800,000
	Parent	2,280,000
	Subsidiary	780,000
	AAP	71,250
	Confirm Gain on AAP	-37,500
	Operating Expenses	3,093,750
	Net Income Attributable to non controlling interest
	Adjusted Net Income Of Subsidiary	311,250
	Non Controlling Share (311,250*20%)	62,250
		Comparative Income Statement
	Sales-a	15,000,000
	Cost of Goods Sold-b	10,200,000
	Gross Profit(c=a-b)	4,800,000
	Operating Expenses-d	3,093,750
	Net Income (e=c-d)	1,706,250
	Net Income Attributable to non controlling interest-f	62,250
	Net income attributable to the parent (e-f)	1,644,000