Chapter 5, Problem 67P

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	2014	2015	2016
Inventories	12,500	12,500
Intangible assets	75,000	7,500	7,500	7,500
Bargain Purchase	(18,750)	(18,750)	-
Net	68,750	1,250	7,500	7,500
100% Unamortized AAP
		Unamortized
	Allocation	12/31/2014	12/31/2015	12/31/2016
Inventories	12,500
Intangible assets	75,000	67,500	60,000	52,500
Bargain Purchase	(18,750)
Net	68,750	67,500	60,000	52,500

90% AAP Amortization
		Amortized
	Allocation	2014	2015	2016
Inventories	11,250	11,250
Intangible assets	67,500	6,750	6,750	6,750
Bargain Purchase	(18,750)	(18,750)
Net	60,000	(750)	6,750	6,750
90% Unamortized AAP
		Unamortized
	Allocation	12/31/2014	12/31/2015	12/31/2016
Inventories	11,250
Intangible assets	67,500	60,750	54,000	47,250
Bargain Purchase	(18,750)			-
Net	60,000	60,750	54,000	47,250

10% AAP Amortization
		Amortized
	Allocation	2014	2015	2016
Inventories	1,250	1,250		-
Intangible asset	7,500	750	750	750
Bargain Purchase	-
Net	8,750	2,000	750	750
10% Unamortized AAP
		Unamortized
	Allocation	12/31/2014	12/31/2015	12/31/2016
Inventories	1,250
Intangible asset	7,500	6,750	6,000	5,250
Bargain Purchase
Net	8,750	6,750	6,000	5,250

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 upstream asset sale:

Intercompany profit recognized on January 1, 2015: $25,000, 10-year remaining life.

Profit confirmed each year: $25,000 / 10 = $2,500

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2016	$0	$22,500
Less: Deferred intercompany profit recognized during 2016	0	(2,500)
Net intercompany profit deferred at December 31, 2016	$0	$0

Intercompany inventory transactions:

Intercompany inventory sales during 2016:  $50,000

  

	Downstream (in Sub’s inventory)	Upstream (in Parent’s inventory)
Intercompany profit in inventory on January 1, 2016	$2,625	0
Intercompany profit in inventory on December 31, 2016	$5,250	$0

Intercompany accounts receivables and payables at December 31, 2016: $12,500

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.

Investment at 1/1/2016 (Equity)
90% x book value of the net assets of subsidiary	225,000
Add: unamortized (90%) AAP	54,000
−Def 100%*EOY D-S IIP	(2,625)
−Def 90%*EOY D-S Asset Gain	(20,250)
	256,125

Investment at 12/31/2016 (Equity)
90% x book value of the net assets of subsidiary	236,250
Add: unamortized (90%) AAP	47,250
−Def. 100%*EOY D-S IIP	(5,250)
−Def. 90%*EOY U-S Asset Gain	(18,000)
	260,250

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	256,125
(1)    p% x net income of Sub. = 90% x $25,000	22,500	11,250	(2)    p% x dividends of Sub. = 90% x $12,500
(4)    100% x downstream inventory  profits recognized during 2016	2,625	6,750	(3)    p% AAP amortization (see part a)
(4)    p% x downstream equipment  profits recognized via depreciation during 2016	2,250	5,250	(4)    70% x upstream inventory  profits deferred during 2016
December 31, 2016	260,250

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
10% of book value of the net assets of subsidiary	25,000
Add:10% unamortized AAP	6,000
−Def 10%*EOY asset Gain	(2,250)
	28,750

NCI at 12/31/2016
10% of book value of the net assets of subsidiary	26,250
Add: 10% unamortized AAP	5,250
−Def. 10%*EOY IIP	0
−Def 10%*EOY Asset Gain	(2,000)
	29,500

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	75,000
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,625
Plus: 100% realized downstream deferred profits - Inventory	(5,250)
Parent’s adjusted stand-alone net income	72,375
Subsidiary’s stand-alone net income	25,000
Less: 100% unrealized upstream deferred profits	2,500
Less: 100% AAP amortization	(7,500)
Subsidiary’s adjusted stand-alone net income	20,000
Consolidated net income	92,375
Parent’s stand-alone net income	75,000
Plus: 100% realized downstream deferred profits - Deprec. Asset	2,625
Plus: 100% realized downstream deferred profits - Inventory	(5,250)
Parent’s adjusted stand-alone net income	72,375
90% x subsidiary’s stand-alone net income	22,500
Less: 90% unrealized upstream deferred profits	(2,250)
Less: 90% AAP amortization	(6,750)
90% x subsidiary’s adjusted stand-alone net income	18,000
Consolidated net income attributable to the CI	90,375
10% x subsidiary’s stand-alone net income	2,500
Less: 10% unrealized upstream deferred profits	250
Less: 10% AAP amortization	(750)
Consolidated net income attributable to the NCI	2,000

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 from subsidiary		$\$15,375$
	Income attributable to NCI		$\$2,000$
	Dividends			$\$12,500$
	Equity investment			$\$4,125$
	Non-controlling interest			$\$750$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$125,000$
	Retained Earnings (S) @BOY		$\$125,000$
	Equity Investment @BOY			$\$225,000$
	Non-controlling interest (@BOY)			$\$25,000$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A] Intangible assets @ BOY		$\$60,000$
	Equity Investment @ BOY			$\$54,000$
	Non-controlling interest @ BOY			$\$6,000$
	(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		$\$7,500$
	Intangible assets			$\$7,500$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment @ BOY		$\$2,625$
	Cost of goods sold			$\$2,625$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$50,000$
	Cost of goods sold			$\$50,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$5,250$
	Inventories			$\$5,250$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$12,500$
	Accounts receivable			$\$12,500$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$20,250$
	Non-controlling investment in subsidiary		$\$2,250$
	Buildings and Equipment, net @ BOY			$\$22,500$
	[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	187,500	[Isales]	50,000			637,500
Cost of Goods Sold	(250,000)	(112,500)	[Icogs]	5,250	[Icogs]	2,625	(315,125)
					[Isales]	50,000
Gross Profit	250,000	75,000					322,375
Depreciation & Amort Expense	(12,500)	(10,000)	[D]	7,500	[Idep]	2,500	(27,500)
Operating Expenses	(162,500)	(40,000)					(202,500)
Total expenses	(175,000)	(50,000)					(230,000)
Income (loss) from Subsidiary	15,375	-	[C]	15,375			-
Consolidated Net Income	90,375	25,000					92,375
Consolidated NI attrib to NCI	-	-	[C]	2,000			(2,000)
Consolidated NI attrib to CI	90,375	25,000					90,375
Statement of Ret Earnings:
Beg. Ret. Earn. - Parent	223,750	125,000	[E]	125,000			223,750
Consolidated NI attrib to CI	90,375	25,000					90,375
Dividends Declared	(75,000)	(12,500)			[C]	12,500	(75,000)
Ending Retained Earnings	239,125	137,500					239,125
Balance sheet
Cash	19,500	25,000					44,500
Accounts receivable	25,000	50,000			[Ipay]	12,500	62,500
Inventories	125,000	37,500			[Icogs]	5,250	157,250
Buildings and Equipment, net	100,000	75,000	[Idep]	2,500	[Igain]	22,500	155,000
Other assets	59,375	125,000					184,375
Intangible assets	-	8,000	[A]	60,000	[D]	7,500	52,500
Equity Investment	260,250		[Icogs]	2,625	[C]	4,125	-
			[Igain]	20,250	[E]	225,000
					[A]	54,000
Total Assets	589,125	312,500					656,125
Accounts Payable	25,000	12,500	[Ipay]	12,500			25,000
Other liabilities	75,000	37,500					112,500
Common Stock	250,000	125,000	[E]	125,000			250,000
Retained Earnings	239,125	137,500					239,125
Non-controlling Interest	-	-	[Igain]	2,250	[C]	750	29,500
					[E]	25,000
					[A]	6,000
Total Liabilities and Equity	589,125	312,500		430,250		430,250	656,125