Assignment
Topic- Consolidation subsequent to date of acquisition-Cost method with non-controlling interest, AAP, and upstream intercompany inventory sale
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 $1,112,000 which is $440,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date. The parent assigned the excess to the following [A] assets:
|
[A]Asset
|
Initial Fair Value
|
Useful Life
|
|
Patent
|
160,000
|
10 years
|
|
Goodwill
|
280,000
|
|
|
440,000
|
|
On the acquisition date, the retained earnings of the subsidiary were $400,000. 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
|
560,000
|
|
Cost of goods sold.
|
(400,000)
|
(464,000)
|
|
Gross profit
|
80,000
|
96,000
|
|
% Inventory remaining
|
25%
|
35%
|
|
Gross profit deferred
|
20,000
|
33,600
|
|
EOY receivable/payable
|
56,000
|
96,000
|
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 subsidiary report the following pre-consolidation financial statements at December 31, 2016:
|
Parent
|
Subsidiary
|
|
Income Statement:
|
|
|
|
Sales
|
5,360,000
|
2,000,000
|
|
Cost of Goods sold
|
(3,600,000)
|
(1,200,000)
|
|
Gross profit
|
1,760,000
|
800,000
|
|
Income (loss) from subsidiary
|
25,600
|
|
|
Operating expenses
|
(1,600,000)
|
(640,000)
|
|
Net Income
|
185,600
|
160,000
|
|
Consolidated NI attrib to NCI
|
|
|
|
Consolidated NI attrib to CI
|
|
|
|
Statement of Ret Earnings:
|
|
|
|
BOY retained earnings
|
1,441,000
|
800,000
|
|
Net income
|
185,600
|
160,000
|
|
Dividends
|
(160,000)
|
(32,000)
|
|
EOY retained earnings
|
1,466,600
|
928,000
|
|
Balance Sheet:
|
|
|
|
Cash
|
480,000
|
320,000
|
|
Accounts receivable
|
640,000
|
480,000
|
|
Inventory
|
800,000
|
640,000
|
|
Equity investment
|
889,600
|
|
|
PPE, net
|
2,960,000
|
800,000
|
|
Patent
|
|
|
|
Goodwill
|
|
|
|
Current liabilities
|
703,000
|
400,000
|
|
Long-term liabilities
|
2,400,000
|
640,000
|
|
Common stock
|
400,000
|
112,000
|
|
APIC
|
800,000
|
160,000
|
|
Retained earnings
|
1,466,600
|
928,000
|
|
Noncontrolling interest
|
|
|
|
5,769,600
|
2,240,000
|
Required:
a. 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.