Chapter 5, Problem 59P

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	2010		AAP	2011		AAP	2012		AAP	2013
100%	1/1/2010	Amort		12/31/2010	Amort		12/31/2011	Amort		12/31/2012	Amort
Patent	160,000	16,000		144,000	16,000		128,000	16,000		112,000	16,000
Goodwill	280,000	0		280,000	0		280,000	0		280,000	0
	440,000	16,000		424,000	16,000		408,000	16,000		392,000	16,000
80%
Patent	128,000	12,800		115,200	12,800		102,400	12,800		89,600	12,800
Goodwill	224,000	0		224,000	0		224,000	0		224,000	0
	352,000	12,800		339,200	12,800		326,400	12,800		313,600	12,800
20%
Patent	32,000	3,200		3,200	3,200		25,600	3,200		22,400	3,200
Goodwill	56,000	0		0	0		56,000	0		56,000	0
	88,000	3,200		84,800	3,200		81,600	3,200		78,400,000	3,200

	Unamort			Unamort			Unamort			Unamort
	AAP	2014		AAP	2015		AAP	2016		AAP
100%	12/31/2013	Amort		12/31/2014	Amort		12/31/2015	Amort		12/31/2016
Patent	96,000	16,000		80,000	16,000		64,000	16,000		48,000
Goodwill	280,000	0		280,000	0		280,000	0		280,000
	376,000	16,000		360,000	16,000		344,000	16,000		328,000
80%
Patent	76,800	12,800		64,000	12,800		51,200	12,800		38,400
Goodwill	224,000	0		224,000	0		224,000	0		224,000
	300,800	12,800		288,000	12,800		275,200	18,000		262,400
20%
Patent	19,200	3,200		16,000	3,200		12,800	3,200		9,600
Goodwill	56,000	0		56,000	0		56,000	0		56,000
	75,200	3,200		72,000	3,200		68,800	3,200		65,600

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	0	20,000
		Intercompany profit on 12/31/16	0	33,600

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 A/C at 1/1/19:
	80% x book value of the net assets of subsidiary	857,600
	Add: unamortized (p%) AAP	275,200
	Less: 100% of downstream deferred intercompany profits	0
	Less: 80% of upstream deferred intercompany profits	(16,000)
		1,116,800
	Equity Investment A/C at 12/31/16:
	80% x book value of the net assets of subsidiary	960,000
	Add: unamortized (80%) AAP	262,400
	Less:  100% of downstream deferred intercompany profits	0
	Less:  80% of upstream deferred intercompany profits	(26,880)
		1,195,520

d.

To determine

Compute the amount of the [ADJ] consolidating entry.

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.

	Computation of [ADJ] amount
	p% of change in RE(S) from acquisition date through BOY	320,000
	Less: Cum p% AAP amort. from acquisition date through BOY	(76,800)
	Less: 100% of the BOY D-S unconf. intercompany inventory profits	0
	Less: 80% of the BOY U-S unconf intercompany inventory profits	(16,000)
	Less: 100% of the BOY D-S unconf. intercompany deprec. asset profits	0
	Less: 80% of the BOY U-S unconf. intercompany deprec. asset profits	0
	[ADJ] Amount	227,200

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 1/1/16:
	20% of book value of the net assets of subsidiary	214,400
	Add: 20% unamortized AAP	68,800
	Less: 10% of upstream deferred intercompany profits	(4,000)
		279,200
	Non-controlling interest at 12/31/16:
	20% of book value of the net assets of subsidiary	240,000
	Add: 20% unamortized AAP	65,600
	Less: 20% of upstream deferred intercompany profits	(6,720)
		298,880

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	160,000
	Subsidiary's stand-alone net income	160,000
	Plus:  100% realized upstream deferred profits	20,000
	Less: 100% unrealized upstream deferred profits	(33,600)
	Less: 100% AAP amortization	(16,000)
	Subsidiary's adjusted stand-alone net income	130,400
	Consolidated net income	290,400
	Parent's stand-alone net income	160,000
	80% of subsidiary's stand-alone net income	128,000
	Plus:  80% realized upstream deferred profits	16,000
	Less: 80% unrealized upstream deferred profits	(26,880)
	Less: 80% AAP amortization	(12,800)
	80% of subsidiary's stand-alone net income	104,320
	Consolidated net income attributable to the controlling interest	264,320
	20% of subsidiary's stand-alone net income	32,000
	Plus:  20% realized upstream deferred profits	4,000
	Less: 20% unrealized upstream deferred profits	(6,720)
	Less: 20% AAP amortization	(3,200)
	Consolidated net income attributable to the non-controlling interest	26,080

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 ($)	Credit ($)
	[ADJ]  Equity Investment		$\$227,200$
	Retained earnings of Parent - BOY			$\$227,200$
	[C] Equity investment income		$\$25,600$
	Consol. NI attributable to NCI		$\$26,080$
	Dividends			$\$32,000$
	Non-controlling interest			$\$19,680$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$112,000$
	APIC (S) @BOY		$\$160,000$
	Retained Earnings (S) @BOY		$\$800,000$
	Equity Investment @BOY			$\$857,600$
	Non-controlling interest (@BOY)			$\$214,400$
	(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)		$\$64,000$
	Patent, net @ BOY (100% AAP)		$\$280,000$
	Equity Investment @ BOY (AAP)			$\$275,200$
	Non-controlling interest			$\$68,800$
	(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.)		$\$16,000$
	Patent, net @ BOY (100% AAP)			$\$16,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$16,000$
	Non-controlling interest		$\$4,000$
	Cost of goods sold			$\$20,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$560,000$
	Cost of goods sold			$\$560,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$33,600$
	Inventory			$\$33,600$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$96,000$
	Accounts receivable			$\$96,000$
	(Elimination of intercompany receivable and payable)

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr	Cr		Consol
Income Statement:
Sales	5,360,000	2,000,000	[Isales]	560,000			6,800,000
Cost of Goods sold	(3,600,000)	(1,200,000)	[Icogs]	33,600	560,000	[Isales]	(4,253,600)
					20,000	[Icogs]
Gross profit	1,760,000	800,000					2,546,400
Income (loss) from subsidiary	25,600		[C]	25,600			0
Operating expenses	(1,600,000)	(640,000)	[D]	16,000			(2,256,000)
Net Income	185,600	160,000					290,400
Consolidated NI attrib to NCI			[C]	26,080			(26,080)
Consolidated NI attrib to CI							264,320
Statement of Ret Earnings:
BOY retained earnings	1,441,000	800,000	[E]	800,000	227,200	[ADJ]	1,668,200
Net income	185,600	160,000					264,320
Dividends	(160,000)	(32,000)			32,000	[C]	(160,000)
EOY retained earnings	1,466,600	928,000					1,772,520
Balance Sheet:
Cash	480,000	350,000					800,000
Accounts receivable	640,000	550,000			96,000	[Ipay]	1,024,000
Inventory	800,000	700,000			33,600	[Icogs]	1,406,400
Equity investment	889,600		[ADJ]	227,200	857,600	[E]	0
			[Icogs]	16,000	275,200	[A]
PPE, net	2,960,000	900,000					3,760,000
Patent			[A]	64,000	16,000	[D]	48,000
Goodwill			[A]	280,000			280,000
	5,769,600	2,240,000					7,318,400
Current liabilities	703,000	400,000	[Ipay]	96,000			1,007,000
Long-term liabilities	2,400,000	640,000					3,040,000
Common stock	400,000	112,000	[E]	112,000			400,000
APIC	800,000	160,000	[E]	160,000			800,000
Retained earnings	1,466,600	928,000					1,722,520
Non-controlling interest			[Icogs]	4,000	19,680	[C]	298,880
					214,400	[E]
					68,800	[A]
	5,769,600	2,240,000		2,420,480	2,420,480		7,318,400