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4. Topic- Consolidation subsequent to date of acquisitionCost method with non-controlling interest, AAP, and upstream intercompany inventory sale

LO 3: 35 Points

Assume that, on January 1, 2010, a parent company acquired an 80% interest in a subsidiary for

$889,600 in cash. The total fair value of the controlling and non-controlling interests on the acquisition

date was $XXXXXXXX which is $XXXXXXX over the book value of the subsidiarys Stockholders Equity

on the acquisition date. The parent assigned the excess to the following [A] assets:

[A]Asset	Initial Fair Value	Useful Life
Patent	160000	10 years
Goodwill	280000
	440000

On the acquisition date, the retained earnings of the subsidiary were $X00,000. The acquisition-date Good-

will is allocated to the parent and subsidiary in an 80:20 proportion, respectively. Assume that the subsid-

iary sells inventory to the parent (upstream) which includes that inventory in products that it ultimately sells

to customers outside of the controlled group. You have compiled the following data as of 2015 and 2016

	2015	2016
Transfer price for inventory sale	480,000 560000
Cost of goods sold.	(400000) (464000)
Gross profit	80000 96000
% Inventory remaining	25% 35%
Gross profit deferred	20000 33600
EOY receivable/payable	56000 96000

The inventory not remaining at the end of the year has been sold outside of the controlled group. The

parent uses the cost method of pre-consolidation investment bookkeeping. The parent and the subsid-

iary report the following pre-consolidation financial statements at December 31, 2016:

Income Statement:	Parent	Subsidiary
Sales	5360000	2000000
Cost of Goods sold	(3,600,000)	(1200000)
Gross profit	1760000	800000
Income (loss) from subsidiary	25600
Operating expenses	-1600000	-640000
Net Income	185600	160000
Consolidated NI attrib to NCI
Consolidated NI attrib to CI
Statement of Ret Earnings:
BOY retained earnings	1141000	800000
Net income	185600	160000
Dividends	-160000	-32000
EOY retained earnings	1466600	928000
Balance Sheet:
Cash	480000	320000
Accounts receivable	640000	480000
Inventory	800000	640000
Equity investment	889600
PPE, net	2960000	800000
Patent
Goodwill
	5769600	2240000
Current liabilities	703000	400000
Long-term liabilities	2400000	640000
Common stock	400000	112000
APIC	800000	160000
Retained earnings	1466600	928000
Noncontrolling interest
	5769600	2240000

Required:

Compute the pre-consolidation Equity Investment account ending balances

assuming that the parent company used the equity method instead of the cost method. For each of

these computations, start with the stockholders equity of the subsidiary.

b. Compute the amount of the [ADJ] consolidating entry.

c. Independently compute the owners equity attributable to the noncontrolling interest

ending balances starting with the owners equity of the subsidiary.

d. Complete the consolidating entries according to the C-E-A-D-I sequence

Answer:

a.	Equity Investment A/C at 12/31/16:
	80% x book value of the net assets of subsidiary
	Add: unamortized (80%) AAP
	Less: 80% of upstream deferred intercompany profits

b.	Computation of [ADJ] amount
	80% of change in RE(S) from acquisition date through BOY
	Less: Cum 80% AAP amort. from acquisition date through BOY
	Less: 80% of the BOY U-S unconf intercompany inventory profits
	[ADJ] Amount
c.
	Noncontrolling interest at 12/31/16:
	20% of book value of the net assets of subsidiary
	Add: 20% unamortized AAP
	Less: 10% of upstream deferred intercompany profits

d.

e.	[ADJ]	Equity Investment
			Retained earnings of Parent - BOY
	[C]	Equity investment income
		Consolidated Net Income attribute to noncontrolling interest
			Dividends
			Noncontrolling interest
	[E]	Common stock (S)
		APIC (S)
		Retained earnings (S)
			Equity investment
			Noncontrolling interest
	[A]	PPE, net
		Patent
			Equity investment
			Noncontrolling interest
	[D]	Operating expenses
			Patent
	[Icogs]	Equity Investment
		Noncontrolling interest
			Cost of Goods Sold
	[Isales]	Sales
			Cost of Goods Sold
	[Icogs]	Cost of Goods Sold
			Inventory
	[Ipay]	Accounts Payable
			Accounts Receivable

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