Question

Preparing a consolidated income statement—Equity method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits
A parent company purchased a 70% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $700,000 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 $400,000 and to an unrecorded patent valued at $300,000. The building asset is being depreciated over a 16-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $1,200,000 of intercompany sales. At the beginning of the current year, there were $80,000 of upstream intercompany profits in the parent’s inventory. At the end of the current year, there were $120,000 of downstream intercompany profits in the subsidiary’s inventory. During the current year, the subsidiary declared and paid $160,000 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	$10,000,000	$2,000,000
Cost of goods sold	(6,800,000)	(1,200,000)
Gross profit	3,200,000	800,000
Income (loss) from subsidiary	74,250	-
Operating expenses	(1,800,000)	(540,000)
Net income	$1,474,250	$260,000

a. Compute the Income (loss) from subsidiary of $74,250 reported by the parent company in its preconsolidation income statement.

Do not use negative signs with your answers below.

Subsidiary's net income		Answer
AAP		Answer
Upstream sales		Answer
Adjusted subsidiary income		Answer
P % of interest	X	Answer	%
		Answer
Downstream sales		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

	working notes
a	Amortization of AAP assets
	AAP asset	value (A)	life (B)	Amortisation per year(A/B)
	Building	$400,000	16	25000
	patent	$300,000	8	37500
	Total	$700,000		62500
	Upstream profits: subsidiary sold to parent
	Beginning upstream profit	$80,000
	Parent shared in deferred beginning profit 70%	$56,000	(80000*70%)
	Non controlling interest shared in deferred beginning	$24,000	(80000*30%)
	profit 30%
	Downstream profits: parent sold to subsidiary
	closing downstream profit	$120,000
	compute income (loss) from subsidiary
	Share in net income of subsidiary (260000*70%)	182000
	Add: Beginning deferred inventory profit	56000
	Less: Ending deferred inventory profit	120000
	Less: share in amortization exp (62500*70%)	43750
	income(loss) from subsidiary	74250
b	Parent and subsidiary
	consolidated income statement for the current year
				Adjustment
		Parent	Subsidiary	Debit	Credit	NCI	Consolidated totals
	Sales	$10,000,000	$2,000,000	$1,200,000			$10,800,000		(10000000+200000-1200000)
	cost of good sold	($6,800,000)	($1,200,000)	$120,000	$80,000		-6840000
					$1,200,000
	gross profit	$3,200,000	$800,000				$3,960,000
	Income(loss) from subsidiary	$74,250		$74,250
	Operating expense	($1,800,000)	($540,000)	$62,500			-2402500
	Net income	$1,474,250	$260,000
	Consolidated net income						$1,557,500
	To Non controlling interest					($83,250)
	To controlling interest						$1,474,250
	Working
1	calculation of non controlling interest
	Net income subsidiary	$260,000
	Add: Deferred profit at the beginning	$80,000
	Less: Amortization expense	$62,500
	Adjusted net income	$277,500
	Share of NCI @30%	$83,250
2	1200000 INTER COMPANY PROFIT ELIMINATE
	120000 ENDING DEFERRED PROFIT ELIMINATE
	80000 BEGINNING DEFERRED PROFIT ELIMINATE
	62500 AMORTIZATION EXPENSE RECORD
	74250 EQUITY EARNINGS ELIMINATE