Question

On January 1, 2016, Aspen Company acquired 80 percent of Birch Company’s voting stock for $288,000. Birch reported a $300,000 book value, and the fair value of the noncontrolling interest was $72,000 on that date. Then, on January 1, 2017, Birch acquired 80 percent of Cedar Company for $104,000 when Cedar had a $100,000 book value and the 20 percent noncontrolling interest was valued at $26,000. 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.

	2016	2017	2018
Sales:
Aspen Company	$415,000	$545,000	$688,000
Birch Company	200,000	280,000	400,000
Cedar Company	Not available	160,000	210,000
Expenses:
Aspen Company	$310,000	$420,000	$510,000
Birch Company	160,000	220,000	335,000
Cedar Company	Not available	150,000	180,000
Dividends declared:
Aspen Company	$ ?20,000	$?40,000	$?50,000
Birch Company	10,000	20,000	20,000
Cedar Company	Not available	2,000	10,000

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, 2017, balance in Aspen’s Investment in Birch Company account?

What is the consolidated net income for this business combination for 2018?

What is the net income attributable to the noncontrolling interest in 2018?

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
12/31/16	?$10,000
12/31/17	?16,000
12/31/18	?25,000

What is the accrual-based net income of Birch in 2017 and 2018, respectively?

Answer 1

a)
Consideration transferred (by Aspen)	$288,000
Noncontrolling interest fair value	$72,000
Birch’s business fair value	$360,000
Book value	-$300,000
Trade name	$60,000
Life	30	years
Annual amortization = $60000/30	$2,000
Consideration transferred for Cedar (by Birch)	$104,000
Noncontrolling interest fair value	$26,000
Cedar’s business fair value	$130,000
Book value	-$100,000
Excess to trade name	$30,000
Life	30	years
Annual amortization = 30000/30	$1,000
Investment in Birch		$288,000
Birch's reported income-2012	$40,000
Amortization expense	-$2,000
Accrual-based income	$38,000
Aspen’s percentage ownership	80.00%
Equity accrual-2012		$30,400
Dividends received 2012 (-10000 x 80%)		-$8,000
Birch's reported income-2013	$60,000
Amortization expense	-$2,000
Income from Cedar [80% x (10000-1000]	$7,200
Accrual-based income	$65,200
Aspen’s percentage ownership	80.00%
Equity accrual-2013		$52,160
Dividends received from Birch 2013 (20000 x 80%)		-$16,000
Investment in Birch 12-31-13		$346,560
b)
Consolidated sales(total for the companies)	$1,298,000
Consolidated expenses (total for the companies)	-$1,025,000
Total amortization expense (see a.)	-$3,000
Consolidated net income for 2014	$270,000
c)
Cedar’s NCI in consolidated net income
Revenues less expenses	$30,000
Excess amortization	-$1,000
Accrual-based income	$29,000
Noncontrolling interest percentage	x20%
Cedar’s NCI in consolidated net income		$5,800
Birch's NCI in consolidated Net income
Revenues less expenses	$65,000
Excess amortization	-$2,000
Equity in Cedar income [(42,400 – 1,200) × 80%]	$23,200
Realized2014 income of Birch	$86,200
Noncontrolling interest percentage	x20%
Birch’s NCI in consolidated net income		$17,240
Total NCIshare of 2014 consolidated net income		$23,040
d)
2013 Realized income of Birch (prior to accounting for unrealized gross profit) (see a)	$65,200
2012 Transfer-gross profit recognized in 2013	$10,000
2013 Transfer-gross profit to be recognized in 2014	-$16,000
2013 Realized income - Birch	$59,200
2014 Realized income of Birch (prior to accounting for unrealized gross profit) (part c)	$86,200
2013 Transfer-gross profit recognized in 2014	16000
2014 Transfer-gross profit to be recognized in 2015	-25000
2014 Realized income—Birch	$77,200