Chapter 5, Problem 66P

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.

100% AAP Amortization		Amortized
	Allocation	2012	2013	2014	2015	2016
Accounts Rec.	(3,200)	(3,200)	-	-	-	-
Buildings & Equipment, net	14,400	2,400	2,400	2,400	2,400	2,400
Licenses	33,600	4,800	4,800	4,800	4,800	4,800
Notes payable	4,800	1,200	1,200	1,200	1,200	-
Goodwill	6,240	-	-	-	-	-
Net	55,840	5,200	8,400	8,400	8,400	7,200
100% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(3,200)	-	-	-	-	-
Buildings & Equipment, net	14,400	12,000	9,600	7,200	4,800	2,400
Licenses	33,600	28,800	24,000	19,200	14,400	9,600
Notes payable	4,800	3,600	2,400	1,200	-	-
Goodwill	6,240	6,240	6,240	6,240	6,240	6,240
Net	55,840	50,640	42,240	33,840	25,440	18,240

70% AAP Amortization		Amortized
	Allocation	2012	2013	2014	2015	2016
Accounts Rec.	(2,240)	(2,240)
Buildings & Equipment, net	10,080	1,680	1,680	1,680	1,680	1,680
Licenses	23,520	3,360	3,360	3,360	3,360	3,360
Notes payable	3,360	840	840	840	840
Goodwill	4,640	-
Net	39,360	3,640	5,880	5,880	5,880	5,040
Cumulative		3,640	9,520	15,400	21,280	26,320
70% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(2,240)	-	-	-
Buildings & Equipment, net	10,080	8,400	6,720	5,040	3,360	1,680
Licenses	23,520	20,160	16,800	13,440	10,080	6,720
Notes payable	3,360	2,520	1,680	840	-	-
Goodwill	4,640	4,640	4,640	4,640	4,640	4,640
Net	39,360	35,720	29,840	23,960	18,080	13,040

30% AAP Amortization		Amortized
	Allocation	2012	2013	2014	2015	2016
Accounts Rec.	(960)	(960)
Buildings & Equipment, net	4,320	720	720	720	720	720
Licenses	10,080	1,440	1,440	1,440	1,440	1,440
Notes payable	1,440	360	360	360	360
Goodwill	1,600
Net	16,480	1,560	2,520	2,520	2,520	2,160
Cumulative		1,560	4,080	6,600	9,120	11,280
30% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(960)	-	-	-	-	-
Buildings & Equipment, net	4,320	3,600	2,880	2,160	1,440	720
Licenses	10,080	8,640	7,200	5,760	4,320	2,880
Notes payable	1,440	1,080	720	360	-	-
Goodwill	1,600	1,600	1,600	1,600	1,600	1,600
Net	16,480	14,920	12,400	9,880	7,360	5,200

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.

Intercompany depreciable asset sale:

One downstream asset sale:

Intercompany profit recognized on January 1, 2015:

$52,000 − $40,000 = $12,000, 6-year remaining life.

Profit confirmed each year: $12,000 / 6 = $2,000

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2016	$10,000	$0
Less: Deferred intercompany profit recognized during 2016	2,000	0
Net intercompany profit deferred at December 31, 2016	$8,000	$0

Intercompany inventory transactions:

Intercompany inventory sales during 2016:  $12,000

  

	Downstream (in Sub’s inventory)	Upstream (in Parent’s inventory)
Intercompany profit in inventory on January 1, 2016	$2,400	$0
Intercompany profit in inventory on December 31, 2016	$0	$1,600

Intercompany accounts receivables and payables at December 31, 2016: $3,200

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.

Investment at 1/1/2016 (Equity)
70% x book value of the net assets of subsidiary	134,400
Add: unamortized (p%) AAP	18,080
-Def. 100%*EOY D-S IIP	(2,400)
-Def. 70%*EOY U-S IIP	-
-Def 100%*EOY D-S Asset Gain	(10,000)
-Def 70%*EOY D-S Asset Gain	-
	140,080

Investment at 12/31/2016 (Equity)
70% x book value of the net assets of subsidiary	139,440
Add: unamortized (p%) AAP	13,040
-Def. 100%*EOY D-S IIP	-
-Def. 70%*EOY U-S IIP	(1,120)
-Def 100%*EOY D-S Asset Gain	(8,000)
-Def 70%*EOY U-S Asset Gain	-
	143,360

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
January 1, 2016	140,080
(1)    p% x net income of Sub. = 70% x $19,200	13,440	8,400	(2)    p% x dividends of Sub. = p% x $15,000
(4)    100% x downstream inventory  profits recognized during 2016	2,400	5,040	(3)    p% AAP amortization (see part a)
(4)    100% x downstream equipment  profits recognized via depreciation during 2016	2,000	1,120	(4)    70% x upstream inventory  profits deferred during 2016
December 31, 2016	143,360

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.

NCI at 1/1/2016
30% of book value of the net assets of subsidiary	57,600
Add:30% unamortized AAP	7,360
	64,960

NCI at 12/31/2016
30% of book value of the net assets of subsidiary	59,760
Add: 30% unamortized AAP	5,200
-Def. 30%*EOY IIP	(480)
-Def 30i%*EOY Asset Gain	-
	64,480

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	57,600
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,000
Plus: 100% realized downstream deferred profits - Inventory	2,400
Parent’s adjusted stand-alone net income	62,000
Subsidiary’s stand-alone net income	19,200
Less: 100% unrealized upstream deferred profits	(1,600)
Less: 100% AAP amortization	(7,200)
Subsidiary’s adjusted stand-alone net income	10,400
Consolidated net income	72,400
Parent’s stand-alone net income	57,600
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,000
Plus: 100% realized downstream deferred profits - Inventory	2,400
Parent’s adjusted stand-alone net income	62,000
90% x subsidiary’s stand-alone net income	13,440
Less: 90% unrealized upstream deferred profits	(1,120)
Less: 90% AAP amortization	(5,040)
90% x subsidiary’s adjusted stand-alone net income	7,280
Consolidated net income attributable to the CI	69,280
10% x subsidiary’s stand-alone net income	5,760
Less: 10% unrealized upstream deferred profits	(480)
Less: 10% AAP amortization	(2,160)
Consolidated net income attributable to the NCI	3,120

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		$\$11,680$
	Consol. NI attributable to NCI		$\$3,120$
	Non-controlling interest		$\$480$
	Dividends			$\$12,000$
	Equity investment			$\$3,280$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$104,000$
	Retained Earnings (S) @BOY		$\$88,000$
	Equity Investment @BOY			$\$134,400$
	Non-controlling interest (@BOY)			$\$57,600$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Buildings and Equipment @ BOY		$\$4,800$
	Licenses @ BOY		$\$14,400$
	Goodwill		$\$6,240$
	Equity Investment @ BOY			$\$18,080$
	Non-controlling interest @ BOY			$\$7,360$
	(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  Depreciation & Amortization expense		$\$7,200$
	Buildings and Equipment, net			$\$2,400$
	Licenses			$\$4,800$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment @ BOY		$\$2,400$
	Cost of goods sold			$\$2,400$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$12,000$
	Cost of goods sold			$\$12,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$1,600$
	Inventories			$\$1,600$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$3,200$
	Accounts receivable			$\$3,200$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$10,000$
	Buildings and Equipment, net @ BOY			$\$10,000$
	[Idep] Buildings and Equipment, net		$\$2,000$
	Depreciation Expense			$\$2,000$

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr		Cr	Consol
Income Statement
Sales	384,000	144,000	[Isales]	12,000			516,000
Cost of Goods Sold	(192,000)	(86,400)	[Icogs]	1,600	[Icogs]	2,400	(265,600)
					[Isales]	12,000
Gross Profit	192,000	57,600					250,400
Depreciation & Amort Expense	(9,600)	(8,000)	[D]	7,200	[Idep]	2,000	(22,800)
Operating Expenses	(120,000)	(28,800)					(148,800)
Interest Expense	(4,800)	(1,600)					(6,400)
Total expenses	(134,400)	(38,400)					(178,000)
Income (loss) from Subsidiary	11,680	-	[C]	11,680			-
Consolidated Net Income	69,280	19,200					72,400
Consolidated NI attrib to NCI	-	-	[C]	3,120			(3,120)
Consolidated NI attrib to CI	69,280	19,200					69,280
Statement of Ret Earnings:
Beg. Ret. Earn. - Parent	172,000						172,000
Beg. Ret. Earn. - Subsidiary		88,000	[E]	88,000			-
Consolidated NI attrib to CI	69,280	19,200					69,280
	241,280	107,200					241,280
Dividends Declared	(48,000)	(12,000)			[C]	12,000	(48,000)
Ending Retained Earnings	193,280	95,200					193,280
Balance Sheet
Cash	31,520	12,000					43,520
Accounts receivable	43,200	38,400			[Ipay]	3,200	78,400
Inventories	104,000	36,800			[Icogs]	1,600	139,200
Buildings and Equipment, net	100,800	72,000	[A]	4,800	[D]	2,400	167,200
			[Idep]	2,000	[Igain]	10,000
Other assets	45,600	80,000					125,600
Licenses	-	8,000	[A]	14,400	[D]	4,800	17,600
Equity Investment	143,360		[Icogs]	2,400	[C]	3,280	-
			[Igain]	10,000	[E]	134,400
					[A]	18,080
Goodwill			[A]	6,240			6,240
Total Assets	468,480	247,200					577,760
Accounts Payable	25,600	9,600	[Ipay]	3,200			32,000
Notes Payable	40,000	17,600					57,600
Other liabilities	17,600	20,800					38,400
Common Stock	192,000	104,000	[E]	104,000			192,000
Retained Earnings	193,280	95,200					193,280
Non-controlling Interest	-	-	[C]	480	[E]	57,600	64,480
					[A]	7,360
Total Liabilities and Equity	468,480	247,200		271,120		271,120	577,760