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	2015	2016	2017	2018	2019
Accounts Rec.	(4,000)	(4,000)	-	-	-	-
Buildings & Equipment, net	18,000	3,000	3,000	3,000	3,000	3,000
Licenses	42,000	6,000	6,000	6,000	6,000	6,000
Notes payable	6,000	1,500	1,500	1,500	1,500	-
Goodwill	34,000	-	-	-	-	-
Net	96,000	6,500	10,500	10,500	10,500	9,000
100% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Accounts Rec.	(4,000)	-	-	-	-	-
Buildings & Equipment, net	18,000	15,000	12,000	9,000	6,000	3,000
Licenses	42,000	36,000	30,000	24,000	18,000	12,000
Notes payable	6,000	4,500	3,000	1,500	-	-
Goodwill	34,000	34,000	34,000	34,000	34,000	34,000
Net	96,000	89,500	79,000	68,500	58,000	49,000

p% AAP Amortization		Amortized
	Allocation	2015	2016	2017	2018	2019
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	27,800	-
Net	77,400	5,200	8,400	8,400	8,400	7,200
Cumulative		5,200	13,600	22,000	30,400	37,600
p% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
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	27,800	27,800	27,800	27,800	27,800	27,800
Net	77,400	72,200	63,800	55,400	47,000	39,800

nci% AAP Amortization		Amortized
	Allocation	2015	2016	2017	2018	2019
Accounts Rec.	(800)	(800)
Buildings & Equipment, net	3,600	600	600	600	600	600
Licenses	8,400	1,200	1,200	1,200	1,200	1,200
Notes payable	1,200	300	300	300	300
Goodwill	6,200
Net	18,600	1,300	2,100	2,100	2,100	1,800
Cumulative		1,300	3,400	5,500	7,600	9,400
nci% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Accounts Rec.	(800)	-	-	-	-	-
Buildings & Equipment, net	3,600	3,000	2,400	1,800	1,200	600
Licenses	8,400	7,200	6,000	4,800	3,600	2,400
Notes payable	1,200	900	600	300	-	-
Goodwill	6,200	6,200	6,200	6,200	6,200	6,200
Net	18,600	17,300	15,200	13,100	11,000	9,200

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, 2018:

$80,000 − $65,000 = $15,000, 6-year remaining life.

Profit confirmed each year: $15,000 / 6 = $2,500

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2019	$12,500	$0
Less: Deferred intercompany profit recognized during 2019	2,500	0
Net intercompany profit deferred at December 31, 2019	$10,000	$0

Intercompany inventory transactions:

Intercompany inventory sales during 2019:  $15,000

  

	Downstream (in Sub’s inventory)	Upstream (in Parent’s inventory)
Intercompany profit in inventory on January 1, 2019	$3,000	$0
Intercompany profit in inventory on December 31, 2019	$0	$2,000

Intercompany accounts receivables and payables at December 31, 2019: 4,000

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 1/1/2019 (Equity)
p% x book value of the net assets of subsidiary	199,200
Add: unamortized (p%) AAP	47,000
-Def. 100%*EOY D-S IIP	(3,000)
-Def. p%*EOY U-S IIP	-
-Def 100%*EOY D-S Asset Gain	(12,500)
-Def p%*EOY D-S Asset Gain	-
	230,700

Investment at 12/31/2019 (Equity)
p% x book value of the net assets of subsidiary	204,800
Add: unamortized (p%) AAP	39,800
-Def. 100%*EOY D-S IIP	-
-Def. p%*EOY U-S IIP	(1,600)
-Def 100%*EOY D-S Asset Gain	(10,000)
-Def p%*EOY U-S Asset Gain	-
	233,000

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
January 1, 2019	230,700
(1)    p% x net income of Sub. = p% x $22,000	17,600	12,000	(2)    p% x dividends of Sub. = p% x $15,000
(4)    100% x downstream inventory  profits recognized during 2019	3,000	7,200	(3)    p% AAP amortization (see part a)
(4)    100% x downstream equipment  profits recognized via depreciation during 2019	2,500	1,600	(4)    p% x upstream inventory  profits deferred during 2019
December 31, 2019	233,000

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.

NCI at 1/1/2019
nci% of book value of the net assets of subsidiary	49,800
Add: nci% unamortized AAP	11,000
	60,800

NCI at 12/31/2019
nci% of book value of the net assets of subsidiary	51,200
Add: nci% unamortized AAP	9,200
-Def. nci%*EOY IIP	(400)
-Def nci%*EOY Asset Gain	-
	60,000

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	67,000
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,500
Plus: 100% realized downstream deferred profits - Inventory	3,000
Parent’s adjusted stand-alone net income	72,500
Subsidiary’s stand-alone net income	22,000
Less: 100% unrealized upstream deferred profits	(2,000)
Less: 100% AAP amortization	(9,000)
Subsidiary’s adjusted stand-alone net income	11,000
Consolidated net income	83,500
Parent’s stand-alone net income	67,000
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,500
Plus: 100% realized downstream deferred profits - Inventory	3,000
Parent’s adjusted stand-alone net income	72,500
80% x subsidiary’s stand-alone net income	17,600
Less: 80% unrealized upstream deferred profits	(1,600)
Less: 80% AAP amortization	(7,200)
80% x subsidiary’s adjusted stand-alone net income	8,800
Consolidated net income attributable to the CI	81,300
20% x subsidiary’s stand-alone net income	4,400
Less: 20% unrealized upstream deferred profits	(400)
Less: 20% AAP amortization	(1,800)
Consolidated net income attributable to the NCI	2,200

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		$\$14,300$
	Consol. NI attributable to NCI		$\$2,200$
	Non-controlling interest		$\$800$
	Dividends			$\$15,000$
	Equity investment			$\$2,300$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$120,000$
	Retained Earnings (S) @BOY		$\$129,000$
	Equity Investment @BOY			$\$199,200$
	Non-controlling interest (@BOY)			$\$49,800$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Buildings and Equipment @ BOY		$\$6,000$
	Licenses @ BOY		$\$18,000$
	Goodwill		$\$34,000$
	Equity Investment @ BOY			$\$47,000$
	Non-controlling interest @ BOY			$\$11,000$
	(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  Depreciation & Amortization expense		$\$9,000$
	Buildings and Equipment, net			$\$3,000$
	Licenses			$\$6,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment @ BOY		$\$3,000$
	Cost of goods sold			$\$3,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$15,000$
	Cost of goods sold			$\$15,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$2,000$
	Inventories			$\$2,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$4,000$
	Accounts receivable			$\$4,000$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$12,500$
	Buildings and Equipment, net @ BOY			$\$12,500$
	[Idep] Buildings and Equipment, net		$\$2,500$
	Depreciation Expense			$\$2,500$

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr		Cr	Consol
Income Statement
Sales	500,000	200,000	[Isales]	15,000			685,000
Cost of Goods Sold	(260,000)	(128,000)	[Icogs]	2,000	[Icogs]	3,000	(372,000)
					[Isales]	15,000
Gross Profit	240,000	72,000					313,000
Depreciation & Amort Expense	(12,000)	(10,000)	[D]	9,000	[Idep]	2,500	(28,500)
Operating Expenses	(155,000)	(38,000)					(193,000)
Interest Expense	(6,000)	(2,000)					(8,000)
Total expenses	(173,000)	(50,000)					(229,500)
Income (loss) from Subsidiary	14,300	-	[C]	14,300			-
Consolidated Net Income	81,300	22,000					83,500
Consolidated NI attrib to NCI	-	-	[C]	2,200			(2,200)
Consolidated NI attrib to CI	81,300	22,000					81,300
Statement of Ret Earnings:
Beg. Ret. Earn. - Parent	266,700						266,700
Beg. Ret. Earn. - Subsidiary		129,000	[E]	129,000			-
Consolidated NI attrib to CI	81,300	22,000					81,300
Dividends Declared	(60,000)	(15,000)			[C]	15,000	(60,000)
Ending Retained Earnings	288,000	136,000					288,000
Balance Sheet
Cash	45,000	25,000					70,000
Accounts receivable	54,000	48,000			[Ipay]	4,000	98,000
Inventories	130,000	46,000			[Icogs]	2,000	174,000
Buildings and Equipment, net	126,000	90,000	[A]	6,000	[D]	3,000	209,000
			[Idep]	2,500	[Igain]	12,500
Other assets	57,000	100,000					157,000
Licenses	-	10,000	[A]	18,000	[D]	6,000	22,000
Equity Investment	233,000		[Icogs]	3,000	[C]	2,300	-
			[Igain]	12,500	[E]	199,200
					[A]	47,000
Goodwill			[A]	34,000			34,000
Total Assets	645,000	319,000					764,000
Accounts Payable	35,000	15,000	[Ipay]	4,000			46,000
Notes Payable	50,000	22,000					72,000
Other liabilities	22,000	26,000					48,000
Common Stock	250,000	120,000	[E]	120,000			250,000
Retained Earnings	288,000	136,000					288,000
Non-controlling Interest	-	-	[C]	800	[E]	49,800	60,000
					[A]	11,000
Total Liabilities and Equity	645,000	319,000		372,300		372,300	764,000