Question

On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for $452,000. Birch reported a $505,000 book value and the fair value of the noncontrolling interest was $113,000 on that date. Also, on January 1, 2013, Birch acquired 80 percent of Cedar Company for $112,000 when Cedar had a $104,000 book value and the 20 percent noncontrolling interest was valued at $28,000. In each acquisition, the subsidiary’s excess acquisition-date fair over book value was assigned to a trade name with a 30-year life.

  

These companies report the following financial information. Investment income figures are not included.

  

	2012		2013		2014
Sales:
Aspen Company		$ 517,500	$	715,000	$	935,000
Birch Company		294,500		368,000		594,600
Cedar Company		Not available		247,100		223,400
Expenses:
Aspen Company		$ 477,500	$	495,000	$	557,500
Birch Company		241,000		305,000		510,000
Cedar Company		Not available		236,000		181,000
Dividends declared:
Aspen Company		$ 18,000	$	45,000	$	55,000
Birch Company		10,000		18,000		18,000
Cedar Company		Not available		2,000		6,000

  

Assume that each of the following questions is independent:

a.	If all companies use the equity method for internal reporting purposes, what is the December 31, 2013, balance in Aspen's Investment in Birch Company account?

      

b.	What is the consolidated net income for this business combination for 2014?

      

c.	What is the net income attributable to the noncontrolling interest in 2014?

      

d.	Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following unrealized gross profits at the end of each year:

  

Date	Amount
12/31/12	$19,700
12/31/13	20,300
12/31/14	25,600

  

What is the realized income of Birch in 2013 and 2014, respectively?

   

Answer 1

a)
Consideration transferred (by Aspen)	$452,000
Noncontrolling interest fair value	$113,000
Birch’s business fair value	$565,000
Book value	-$505,000
Trade name	$60,000
Life	30	years
Annual amortization = $60000/30	$2,000
Consideration transferred for Cedar (by Birch)	$112,000
Noncontrolling interest fair value	$28,000
Cedar’s business fair value	$140,000
Book value	-$104,000
Excess to trade name	$36,000
Life	30	years
Annual amortization = 36000/30	$1,200
Investment in Birch		$452,000
Birch's reported income-2012 ($294500 - $241000)	$53,500
Amortization expense	-$2,000
Accrual-based income	$51,500
Aspen’s percentage ownership	80.00%
Equity accrual-2012		$41,200
Dividends received 2012 (-10000 x 80%)		-$8,000
Birch's reported income-2013 ($368000-$305000)	$63,000
Amortization expense	-$2,000
Income from Cedar [80% x ($247,100 - $236,000)-$1200]	$7,920
Accrual-based income	$68,920
Aspen’s percentage ownership	80.00%
Equity accrual-2013		$55,136
Dividends received from Birch 2013 (18000 x 80%)		-$14,400
Investment in Birch 12-31-13		$525,936
b)
Consolidated sales(total for the companies)	$1,753,000
Consolidated expenses (total for the companies)	-$1,248,500
Total amortization expense (see a.)	-$3,200
Consolidated net income for 2014	$501,300
c)
Cedar’s NCI in consolidated net income
Revenues less expenses	$42,400
Excess amortization	-$1,200
Accrual-based income	$41,200
Noncontrolling interest percentage	x20%
Cedar’s NCI in consolidated net income		$8,240
Birch's NCI in consolidated Net income
Revenues less expenses	$84,600
Excess amortization	-$2,000
Equity in Cedar income [(42,400 – 1,200) × 80%]	$32,960
Realized2014 income of Birch	$115,560
Noncontrolling interest percentage	x20%
Birch’s NCI in consolidated net income		$23,112
Total NCIshare of 2014 consolidated net income		$31,352
d)
2013 Realized income of Birch (prior to accounting for unrealized gross profit) (see a)	$68,920
2012 Transfer-gross profit recognized in 2013	$19,700
2013 Transfer-gross profit to be recognized in 2014	-$20,300
2013 Realized income - Birch	$68,320
2014 Realized income of Birch (prior to accounting for unrealized gross profit) (part c)	$115,560
2013 Transfer-gross profit recognized in 2014	20300
2014 Transfer-gross profit to be recognized in 2015	-25600
2014 Realized income—Birch	$110,260