Question

On January 1, 2016, Aspen Company acquired 80 percent of Birch Company's voting stock for $424,000. Birch reported a $425,000 book value and the fair value of the noncontrolling interest was $106,000 on that date. Then, on January 1, 2017, Birch acquired 80 percent of Cedar Company for $232,000 when Cedar had a $218,000 book value and the 20 percent noncontrolling interest was valued at $58,000. 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	$	652,500	$	785,000	$	885,000
Birch Company		292,500		335,750		611,200
Cedar Company	Not available			213,100		236,600
Expenses:
Aspen Company	$	447,500	$	485,000	$	615,000
Birch Company		230,000		251,000		527,500
Cedar Company	Not available			203,000		187,000
Dividends declared:
Aspen Company	$	20,000	$	40,000	$	50,000
Birch Company		10,000		15,000		15,000
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	$12,000
12/31/17	16,800
12/31/18	27,600

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

Answer 1

Part A

Consideration transferred (by Aspen)	424,000
Noncontrolling interest fair value	106,000
Birch's business fair value	530000
Book value	(425,000)
Trade name	105000
Life	30
Annual amortization	3500

Consideration transferred for Cedar (by Birch)	232,000
Noncontrolling interest fair value	58,000
Cedar's business fair value	290000
Book value	(218000)
Trade name	72000
Life	30
Annual amortization	2400

Investment in Birch		424,000
Birch's reported income-2016 (292,500-230,000)	62500
Amortization expense	(3500)
Accrual-based income	59000
Birch’s percentage ownership	80%
Equity accrual-2016		47200
Dividends received 2016 (10000*80%)		(8000)
Birch's reported income-2017 (335,750-251,00)	84750
Amortization expense	(3500)
Income from Cedar [80% × ($(213,100-203,000)- $2400)]	6160
Accrual-based income	87410
Birch’s percentage ownership	80%
Equity accrual - 2017		69928
Dividends received from Birch 2017 (15000*80%)		(12000)
Investment in Birch, December 31, 2017		521128

Part B

Consolidated sales (total for the companies) (885000+611200+236600)	1732800
Consolidated expenses (total for the companies) (615,000+527,500+187,000)	(1329500)
Total amortization expense (3500+2400)	(5900)
Consolidated net income for 2018	397400

Part C

Cedar’s NCI in consolidated net income:
Revenues less expenses (236,600-187,000)	49600
Excess amortization	(2400)
Accrual-based income	47200
Noncontrolling interest percentage	20%
Cedar’s NCI in consolidated net income		9440
Birch’s NCI in consolidated net income:
Revenues less expenses (611200-527500)	83700
Excess amortization	(3500)
Equity in Cedar income [(49600 – 2400) × 80%	37760
Realized 2018 income of Birch	117960
Outside ownership	20%	23592
Total NCI share of 2018 consolidated net income		33032

Part D

2017 Realized net income of Birch (prior to accounting for unrealized gross profit)	87410
2016 Transfer-gross profit recognized in 2017	12000
2017 Transfer-gross profit to be recognized in 2018	(16800)
2017 Realized net income - Birch	82610

2018 Realized net income of Birch (prior to accounting for unrealized gross profit)	117960
2017 Transfer-gross profit recognized in 2018	16800
2018 Transfer-gross profit to be recognized in 2019	(27600)
2018 Realized net income—Birch	107160