Chapter 5, Problem 58P

a.

To determine

Disaggregate and document the AAP 100 percent activity, 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	2009		AAP	2010		AAP	2011		AAP	2012
100%	1/1/2009	Amort		12/31/2009	Amort		12/31/2010	Amort		12/31/2011	Amort
PPE, net	300,000	20,000		280,000	20,000		260,000	20,000		240,000	20,000
Patent	200,000	20,000		180,000	20,000		160,000	20,000		140,000	20,000
Goodwill	400,000	0		400,000	0		400,000	0		400,000	0
	900,000	40,000		860,000	40,000		820,000	40,000		780,000	40,000
80%
PPE, net	240,000	16,000		218,700	16,000		208,000	16,000		192,000	16,000
Patent	160,000	16,000		144,000	16,000		128,000	16,000		112,000	16,000
Goodwill	320,000	0		320,000	0		320,000	0		320,000	0
	720,000	32,000		688,000	32,000		656,000	32,000		624,000	32,000
20%
PPE, net	60,000	4,000		56,000	4,000		52,000	4,000		48,000	4,000
Patent	40,000	4,000		36,000	4,000		52,000	4,000		28,000	4,000
Goodwill	80,000	0		80,000	0		80,000	0		80,000	0
	180,000	8,000		172,000	5,400		164,000	8,000		156,000	8,000

	Unamort			Unamort			Unamort			Unamort			Unamort
	AAP	2013		AAP	2014		AAP	2015		AAP	2016		AAP
100%	12/31/2012	Amort		12/31/2013	Amort		12/31/2014	Amort		12/31/2015	Amort		12/31/2016
PPE, net	220,000	20,000		200,000	20,000		180,000	20,000		160,000	20,000		140,000
Patent	120,000	20,000		100,000	20,000		80,000	20,000		60,000	20,000		40,000
Goodwill	400,000	0		400,000	0		400,000	0		400,000	0		400,000
	740,000	40,000		700,000	40,000		660,000	40,000		620,000	40,000		580,000
80%
PPE, net	176,000	16,000		160,000	16,000		144,000	16,000		128,000	16,000		112,000
Patent	96,000	16,000		80,000	16,000		64,000	16,000		48,000	16,000		32,000
Goodwill	320,000	0		320,000	0		320,000	0		320,000	0		320,000
	592,000	32,000		560,000	32,000		528,000	32,000		496,000	32,000		464,000
20%
PPE, net	44,000	4,000		40,000	4,000		36,000	4,000		32,000	4,000		28,000
Patent	24,000	4,000		20,000	4,000		16,000	4,0000		12,000	4,000		8,000
Goodwill	80,000	0		80,000	0		80,000	0		80,000	0		80,000
	148,000	8,000		140,000	8,000		132,000	8,000		124,000	8,000		116,000

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 1/1/16	37,500	0
		Intercompany profit on 12/31/16	30,000	0

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 1/1/16:
	80% x book value of the net assets of subsidiary	904,000
	Add: unamortized (80%) AAP	496,000
	Less: 100% of downstream deferred intercompany profits	(37,500)
	Less: 80% of upstream deferred intercompany profits	0
		1,362,500
	Equity Investment account at 12/31/16:
	80% x book value of the net assets of subsidiary	920,000
	Add: unamortized (p%) AAP	464,000
	Less:  100% of downstream deferred intercompany profits	(30,000)
	Less:  80% of upstream deferred intercompany profits	0
		1,354,000

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 1/1/16	1,362,500
	80% Net Income	80,000	64,000	80% Dividends
	100% BOY D-S inventory profits	37,500	32,000	80% AAP Amortization
			30,000	100% EOY D-S inventory profits
	Equity Investment at 12/31/16	1,354,000

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 1/1/16:
	20% of book value of the net assets of subsidiary	226,000
	Add: 20% unamortized AAP	124,000
		350,000
	Non-controlling interest at 12/31/16:
	20% of book value of the net assets of subsidiary	230,000
	Add: 20% unamortized AAP	116,000
		346,000

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	600,000
	Plus:  100% realized downstream deferred profits	37,500
	Less:  100% unrealized downstream deferred profits	(30,000)
	Parent's adjusted stand-alone net income	607,500
	Subsidiary's stand-alone net income	100,000
	Less: 100% AAP amortization	(40,000)
	Subsidiary's adjusted stand-alone net income	60,000
	Consolidated net income	667,500
	Parent's stand-alone net income	600,000
	Plus:  100% realized downstream deferred profits	37,500
	Less:  100% unrealized downstream deferred profits	(30,000)
	Parent's adjusted stand-alone net income	607,500
	80% of subsidiary's stand-alone net income	80,000
	Less: 80% AAP amortization	(32,000)
	80% of subsidiary's stand-alone net income	48,000
	Consolidated net income attributable to the controlling interest	655,500
	20% of subsidiary's stand-alone net income	20,000
	Less: 20% AAP amortization	(8,000)
	Consolidated net income attributable to the non-controlling interest	12,000

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 income		$\$55,500$
	Consol. NI attributable to NCI		$\$12,000$
	Equity investment		$\$8,500$
	Non-controlling interest		$\$4,000$
	Dividends			$\$80,000$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$100,000$
	APIC (S) @BOY		$\$430,000$
	Retained Earnings (S) @BOY		$\$600,000$
	Equity Investment @BOY			$\$904,000$
	Non-controlling interest (@BOY)			$\$226,000$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  PPE, net @ BOY (100% AAP)		$\$160,000$
	Patent, net @ BOY (100% AAP)		$\$60,000$
	Goodwill @ BOY (100% AAP)		$\$400,000$
	Equity Investment @ BOY (AAP)			$\$496,000$
	Non-controlling interest			$\$124,000$
	(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.)		$\$40,000$
	PPE, net (for 100% AAP amort.)			$\$20,000$
	Patent, net @ BOY (100% AAP)			$\$20,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$37,500$
	Cost of goods sold			$\$37,500$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$400,000$
	Cost of goods sold			$\$400,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$30,000$
	Inventory			$\$30,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$50,000$
	Accounts receivable			$\$50,000$
	(Elimination of intercompany receivable and payable)

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr	Cr		Consol
Income Statement:
Sales	6,000,000	1,000,000	[Isales]	400,000			6,600,000
Cost of Goods sold	(4,500,000)	(600,000)	[Icogs]	30,000	400,000	[Isales]	(4,692,500)
					37,500	[Icogs]
Gross profit	1,350,000	400,000					1,907,500
Income (loss) from subsidiary	55,500		[C]	55,500			0
Operating expenses	(900,000)	(300,000)	[D]	40,000			(1,240,000)
Net Income	655,500	100,000					667,500
Consolidated NI attrib to NCI			[C]	12,000			(12,000)
Consolidated NI attrib to CI							556,200
Statement of Ret Earnings:
BOY retained earnings	2,000,000	600,000	[E]	600,000			2,000,000
Net income	655,500	100,000					655,500
Dividends	(200,000)	(80,000)			80,000	[C]	(200,000)
EOY retained earnings	2,455,500	620,000					2,455,500
Balance Sheet:
Cash	500,000	50,000					550,000
Accounts receivable	750,000	300,000			50,000	[Ipay]	1,000,000
Inventory	1,000,000	400,000			30,000	[Icogs]	1,370,000
Equity investment	1,354,000		[C]	8,500			0
			[Icogs]	37,500	904,000	[E]
					496,000	[A]
PPE, net	3,000,000	1,000,000	[A]	160,000	20,000	[D]	4,140,000
Patent			[A]	60,000	20,000	[D]	40,000
Goodwill			[A]	400,000			400,000
	6,604,000	1,750,000					7,500,000
Current liabilities	648,500	100,000	[Ipay]	50,000			698,500
Long-term liabilities	2,000,000	500,000					2,500,000
Common stock	500,000	100,000	[E]	100,000			500,000
APIC	1,000,000	430,000	[E]	430,000			1,000,000
Retained earnings	2,455,500	620,000					2,455,500
Non-controlling interest			[C]	4,000	226,000	[E]	346,000
					124,000	[A]
	6,604,000	1,750,000		2,387,500	2,387,500		7,500,000