Chapter 5, Problem 56P

a.

To determine

Disaggregate and document the AAP 100 percent activity, the AAP controlling interest

and the AAP controlling interest, and the AAP non-controlling interest.

Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

An acquisition premium is the distinction between the actual price paid to purchase a business and the pre-acquisition approximately real value of the acquired firm. It's often recorded on the balance sheet as "goodwill."

A controlling interest is a shareholding interest in a corporation with sufficient voting stock shares to take precedence in the action of any shareholder. A majority (over 50 per cent) of the voting shares is always a controlling interest.

A non-controlling interest, also known as NCI or minority interest, is a stance of possession where a corporate shareholder owns less than 50% of outstanding shares and can only impact management decisions rather than controlling them.

	Unamort			Unamort			Unamort			Unamort
	AAP	2013		AAP	2014		AAP	2015		AAP	2016
100%	1/1/2013	Amort		12/31/2013	Amort		12/31/2014	Amort		12/31/2015	Amort
Patent	180,000	18,000		162,000	18,000		144,000	18,000		126,000	18,000
Goodwill	300,000	0		300,000	0		300,000	0		300,000	0
	480,000	18,000		462,000	18,000		444,000	18,000		426,000	18,000
p%
Patent	144,000	14,400		129,600	14,400		115,200	14,400		100,800	14,400
Goodwill	240,000	0		240,000	0		240,000	0		240,000	0
	384,000	14,400		369,600	14,400		355,200	14,400		340,800	14,400
nci%
Patent	36,000	3,600		32,400	3,600		28,800	3,600		25,200	3,600
Goodwill	60,000	0		60,000	0		60,000	0		60,000	0
	96,000	3,600		92,400	3,600		88,800	3,600		85,200	3,600

	Unamort			Unamort			Unamort			Unamort
	AAP	2017		AAP	2018		AAP	2019		AAP
100%	12/31/2016	Amort		12/31/2017	Amort		12/31/2018	Amort		12/31/2019
Patent	108,000	18,000		90,000	18,000		72,000	18,000		54,000
Goodwill	300,000	0		300,000	0		300,000	0		300,000
	408,000	18,000		390,000	18,000		372,000	18,000		354,000
p%
Patent	86,400	14,400		72,000	14,400		57,600	14,400		43,200
Goodwill	240,000	0		240,000	0		240,000	0		240,000
	326,400	14,400		312,000	14,400		297,600	14,400		283,200
nci%
Patent	21,600	3,600		18,000	3,600		14,400	3,600		10,800
Goodwill	60,000	0		60,000	0		60,000	0		60,000
	81,600	3,600		78,000	3,600		74,400	3,600		70,800

b.

To determine

Calculate and organize the profits and losses on intercompany transactions and balances.

Explanation of Solution

Consolidation is about combining two or more entities' assets, liabilities, and other

financial items into one. The concept consolidate in the context of financial accounting

often refers to the consolidation of financial statements in which all subsidiaries report

under the umbrella of a parent company.

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The transactions between inter-companies are between a parent company and its subsidiaries or other related entities. If the parent company sells inventory to the related entity, this problem may become more complex.

			Downstream	Upstream
		Intercompany profit on 1/1/19	0	28,000
		Intercompany profit on 12/31/19	0	37,500

c.

To determine

Compute the starting and ending balances of the pre-consolidation Equity Investment

account starting with the equity of the subsidiary 's stockholders.

Explanation of Solution

Consolidation is about combining two or more entities' assets, liabilities, and other

financial items into one. The concept of consolidation in the context of financial

accounting often refers to the consolidation of financial statements in which all

subsidiaries report under the umbrella of a parent company.

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

	Equity Investment account at 1/1/19:
	p% x book value of the net assets of subsidiary	992,000
	Add: unamortized (p%) AAP	297,600
	Less: p% of upstream deferred intercompany profits	(22,400)
		1,267,200
	Equity Investment account at 12/31/19:
	p% x book value of the net assets of subsidiary	1,120,000
	Add: unamortized (p%) AAP	283,200
	Less:  p% of upstream deferred intercompany profits	(30,000)
		1,373,200

d.

To determine

Reconstruction of the pre-consolidation activities of the parent Equity Investment T-

account for the year of consolidation.

Explanation of Solution

Consolidation is about combining two or more entities' assets, liabilities, and other

financial items into one. The concept of consolidation in the context of financial

accounting often refers to the consolidation of financial statements in which all

subsidiaries report under the umbrella of a parent company.

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

A controlling interest is a shareholding interest in a corporation with sufficient voting stock shares to take precedence in the action of any shareholder. A majority (over 50 per cent) of the voting shares is always a controlling interest.

A non-controlling interest, also known as NCI or minority interest is a stance of possession where a corporate shareholder owns less than 50% of outstanding shares and can only impact management decisions rather than controlling them.

	Equity Investment
	Equity Investment at 1/1/19	1,267,200
	p% Net Income	160,000	32,000	p% Dividends
	p% BOY U-s inventory profits	22,400	14,400	p% AAP Amortization
			30,000	p% EOY U-S inventory profits
	Equity Investment at 12/31/19	1,373,200

e.

To determine

Calculate the owners' equity attributable to the starting and ending of non-controlling

interest balances beginning with the owners ' equity of the subsidiary.

Explanation of Solution

Equity income is money generated from stock dividends that investors can access by buying dividend-declared stocks or by buying funds that invest in dividend-declared stocks.

A controlling interest is a shareholding interest in a corporation with sufficient voting stock shares to take precedence in the action of any shareholder. A majority (over 50 per cent) of the voting shares is always a controlling interest.

A non-controlling interest, also known as NCI or minority interest is a stance of possession where a corporate shareholder owns less than 50% of outstanding shares and can only impact management decisions rather than controlling them.

	Non-controlling interest at 1/1/19:
	nci% of book value of the net assets of subsidiary	248,000
	Add: nci% unamortized AAP	74,400
	Less: nci% of upstream deferred intercompany profits	(5,600)
		316,800
	Non-controlling interest at 12/31/19:
	nci% of book value of the net assets of subsidiary	280,000
	Add: nci% unamortized AAP	70,800
	Less: nci% of upstream deferred intercompany profits	(7,500)
		343,300

f.

To determine

Calculate consolidated net income, controlling interest net income and non-controlling

interest net income.

Explanation of Solution

Consolidation is about combining two or more entities' assets, liabilities, and other

financial items into one. The concept consolidate in the context of financial accounting

often refers to the consolidation of financial statements in which all subsidiaries report

under the umbrella of a parent company.

Consolidated net income is the sum of the parent's net income excluding any subsidiary

income recognized in its individual financial statements plus the net income of its

subsidiaries determined after excluding unrealized inventory gain, intra-group income,

etc.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

	Parent's stand-alone net income	200,000
	Subsidiary's stand-alone net income	200,000
	Plus:  100% realized upstream deferred profits	28,000
	Less: 100% unrealized upstream deferred profits	(37,500)
	Less: 100% AAP amortization	(18,000)
	Consolidated net income	372,500
	Parent's stand-alone net income	200,000
	p% of subsidiary's stand-alone net income	160,000
	Plus:  p% realized upstream deferred profits	22,400
	Less: p% unrealized upstream deferred profits	(30,000)
	Less: p% AAP amortization	(14,400)
	Consolidated net income attributable to the controlling interest	338,000
	nci% of subsidiary's stand-alone net income	40,000
	Plus:  nci% realized upstream deferred profits	5,600
	Less: nci% unrealized upstream deferred profits	(7,500)
	Less: nci% AAP amortization	(3,600)
	Consolidated net income attributable to the noncontrolling interest	34,500

g.

To determine

Complete the C-E-A-D-I consolidation entries and execute the consolidation worksheet.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies. A party outside the economic unit embodied in the consolidated financial statements does not retain the equity of the shareholders of the subsidiary, and therefore should not be included in the consolidated shareholders' equities.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[C] Equity investment income		$\$138,000$
	Consol. NI attributable to NCI		$\$34,500$
	Dividends			$\$40,000$
	Equity investment			$\$106,000$
	Non-controlling interest			$\$26,500$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$100,000$
	APIC (S) @BOY		$\$200,000$
	Retained Earnings (S) @BOY		$\$940,000$
	Equity Investment @BOY			$\$992,000$
	Non-controlling interest (@BOY)			$\$248,000$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Patent, net @ BOY (100% AAP)		$\$72,000$
	Goodwill, net @ BOY (100% AAP)		$\$300,000$
	Equity Investment @ BOY (AAP)			$\$297,600$
	Non-controlling interest			$\$74,400$
	(Allocates beginning-of-year 100% AAP to the controlling and non-controlling interests by eliminating the remaining investment account and establishing the BOY AAP for nci%)
	[D  Operating expenses (for 100% AAP amort.)		$\$18,000$
	Patent, net (for 100% AAP amort.)			$\$18,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$22,400$
	Non-controlling interest @BOY		$\$5,600$
	Cost of goods sold			$\$28,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$600,000$
	Cost of goods sold			$\$600,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$37,500$
	Inventory			$\$37,500$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$140,000$
	Accounts receivable			$\$140,000$
	(Elimination of intercompany receivable and payable)

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr	Cr		Consol
Income Statement:
Sales	6,700,000	2,500,000	[Isales]	600,000			8,600,000
Cost of Goods sold	(4,500,000)	(1,500,000)	[Icogs]	37,500	600,000	[Isales]	(5,409,500)
					28,000	[Icogs]
Gross profit	2,200,000	1,000,000					3,190,500
Income (loss) from subsidiary	138,000		[C]	138,000			0
Operating expenses	(2,000,000)	(800,000)	[D]	18,000			(2,818,000)
Net Income	338,000	200,000					372,500
Consolidated NI attrib to NCI			[C]	34,500			(34,500)
Consolidated NI attrib to CI							338,000
Statement of Ret Earnings:
BOY retained earnings	2,035,200	940,000	[E]	940,000			2,035,200
Net income	338,000	200,000					338,000
Dividends	(200,000)	(40,000)			40,000	[C]	(200,000)
EOY retained earnings	2,173,200	1,100,000					2,173,200
Balance Sheet:
Cash	500,000	400,000					900,000
Accounts receivable	700,000	600,000			140,000	[Ipay]	1,160,000
Inventory	900,000	800,000			37,500	[Icogs]	1,662,500
Equity investment	1,373,200		[Icogs]	22,400	106,000	[C]	0
					992,000	[E]
					297,600	[A]
PPE, net	4,000,000	1,000,000					5,000,000
Patent			[A]	72,000	18,000	[D]	54,000
Goodwill			[A]	300,000			300,000
	7,473,200	2,800,000					9,076,500
Current liabilities	800,000	500,000	[Ipay]	140,000			1,160,000
Long-term liabilities	3,000,000	900,000					3,900,000
Common stock	500,000	100,000	[E]	100,000			500,000
APIC	1,000,000	200,000	[E]	200,000			1,000,000
Retained earnings	2,173,200	1,100,000					2,173,200
Non-controlling interest			[Icogs]	5,600	26,500	[C]	343,300
					248,000	[E]
					74,400	[A]
	7,473,200	2,800,000		2,608,000	2,608,000		9,076,500