Chapter 4, Problem 58P

a.

To determine

Segregate and record the 100 percent Accounting Premium Acquisition (AAP) activity

through 31 December 2016.

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."

The activity for the 100% Acquisition Accounting Premium (AAP) through Dec 31, 2016 is as follows:

		Year Ended December 31
100% AAP Amortization - Dr (CR)		2013	2014	2015	2016
Accounts Receivable		(12,000)	-	-	-
Property, plant and equipment (PPE), net		3,000	3,000	3,000	3,000
Licenses		9,600	9,600	9,600	9,600
Customer list		12,000	12,000	12,000	12,000
Notes Payable		1,200	1,200	1,200	1,200
Goodwill
Net amortization		13,800	25,800	25,800	25,800
	Jan. 1	December 31,
100% Unamortized AAP  - Dr (CR)	2013	2013	2014	2015	2016
Accounts Receivable	(12,000)	-	-	-	-
Property, plant and equipment (PPE), net	48,000	45,000	42,000	39,000	36,000
Licenses	96,000	86,400	76,800	67,200	57,600
Customer list	60,000	48,000	36,000	24,000	12,000
Notes Payable	6,000	4,800	3,600	2,400	1,200
Goodwill	336,000	336,000	336,000	336,000	336,000
Net unamortized	534,000	520,200	494,000	468,600	442,800

b.

To determine

Calculate and organize profits and losses on intercompany transactions and balance

between companies..

Explanation of Solution

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 on a stock exchange.

A transaction between intercompany is one between a parent company and its subsidiaries or other related entities. They often create issues with a parent company's relationship with its bankers and lenders. Intercompany transactions occur when a legal entity unit has a transaction inside the same entity with another unit.

The below table shows the deferred inventory profit is as follows:

	FYE 2015		FYE2016
Intercompany sales	96,000		120,000
	Intercompany EI
	12/31/15		12/31/16
Downstream	-		72,000
Upstream	48,000		-
Intercompany Inventory Profits (28%)	12/31/15		12/31/16
Downstream	-		20,160
Upstream	13,440		-
Unpaid Intercompany amount	28,800		38,400

Table (1)

The computation to show the deferred I-C asset sales profit is as follows:

I-C Sale Amount	240,000
Pre-Sale Carrying Value	192,000
I-C Gain (Loss)	$\$48,000$
Useful Life	8
Confirmed Each Year	6,000
Unconfirmed BOY	36,000
Unconfirmed EOY	30,000

c.

To determine

Calculate the amount of the Annual Adjustment [ADJ] required to consolidate the

financial statements for the year ended 31 December 2016.

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.

The computation of the BOY [ADJ] necessary for consolidation for the year ended Dec 31, 2019 is as follows:

Particulars	Amount ($)
Change in RE (S) thru BOY	$\$318,000$
Cumulative AAP amort. thru BOY	$(\$65,400)$
BOY upstream IIP	$(\$13,440)$
BOY Downstream Unconfirmed asset	$(\$36,000)$
ADJ amount	$\$203,160$

Table (1)

Working notes:

RE of subsidiary on Jan 1, 2013 is $\$282,000$

BOY retained earnings of the subsidiary for the year ended Dec 31, 2016 is $\$600,000$

Calculate change in RE(S) through BOY:

$\begin{array}{c}\text{Change in RE}=\$600,000-\$282,000\\ =\$318,000\end{array}$

d.

To determine

Complete the [ADJ] and 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.

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] BOY Equity Investment		$\$203,160$
	BOY Retained Earnings (P)			$\$203,160$
	[C] Income (loss) from subsidiary		$\$86,400$
	Dividends			$\$86,400$
	[E]  Common Stock (S) @ BOY		$\$144,000$
	APIC (S) @BOY		$\$576,000$
	Retained Earnings (S) @BOY		$\$600,000$
	Equity Investment @BOY			$\$1,320,000$
	[A]  PPE, net		$\$39,000$
	Licenses		$\$67,200$
	Customer List		$\$24,000$
	Goodwill		$\$336,000$
	Note Payable		$\$2,400$
	Equity Investment @ BOY			$\$468,600$
	[D  Dep and amort expenses		$\$24,600$
	Interest Expense		$\$1,200$
	PPE, net			$\$3,000$
	Licenses			$\$9,600$
	Customer List			$\$12,000$
	Notes Payable			$\$1,200$
	(To record depreciation and amortization expense for the [A] assets)
	[Icogs] Equity investment @BOY		$\$13,440$
	Cost of goods sold			$\$13,440$
	[Isales] Sales		$\$120,000$
	Cost of goods sold			$\$120,000$
	[Icogs] Cost of goods sold		$\$20,160$
	Inventory			$\$20,160$
	[Ipay] Accounts payable		$\$38,400$
	Accounts receivable			$\$38,400$
	[Igain] Equity investment		$\$36,000$
	PPE, net			$\$36,000$
	[Idep] PPE, net		$\$6,000$
	Depreciation expense			$\$6,000$

The consolidated spreadsheet for the year ended December 31, 2019 is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		$2,376,000		$1,128,000	[Isales]	120,000				$3,384,000
Cost of goods sold		(1,296,000)		(669,600)	[Icogs]	20,160	[Icogs]	13,440		(1,852,320)
							[Isales]	120,000
Gross Profit		1,080,000		458,400						1,531,680
Depreciation and Amortization expense		(72,000)		(48,000)	[D]	24,600	[Idep]	6,000		(138,600)
Operating Expenses		(720,000)		(192,000)						(912,000)
Interest Expense		(40,800)		(12,000)	[D]	1,200				(54,000)
Total expenses		(832,800)		(252,000)						(1,104,600)
Income (loss) from subsidiary		86,400			[C]	86,400				0
Net Income		$333,600		$206,400						$427,080
Statement of Retained Earnings
Beginning Retained Earnings		$1,320,000		$600,000	[E]	600,000	[ADJ]	203,160		1,523,160
Net Income		333,600		206,400						427,080
Dividends		(273,600)		(86,400)			[C]	86,400		(273,600)
Ending retained Earnings		$1,380,000		$720,000						$1,676,640
Balance Sheet
Assets
Cash		216,000		$144,000						$360,000
Accounts receivable		288,000		216,000			[Ipay]	38,400		465,600
Inventories		672,000		210,000			[Icogs]	20,160		987,840
Equity Investment		1,536,000			[ADJ]	203,160	[E]	1,320,000		0
					[Icogs]	13,440	[A]	468,600
					[Igain]	36,000
PPE, net		816,000		600,000	[A]	39,000	[D]	3,000		1,422,000
					[Idep]	6,000	[Igain]	36,000
Other assets		312,000		504,000						816,000
Licenses				24,000	[A]	67,200	[D]	9,600		81,600
Customer List					[A]	24,000	[D]	12,000		12,000
Goodwill					[A]	336,000				336,000
Total assets		$3,840,000		$1,824,000						$4,481,040
Liabilities and Stockholder's Equity
Accounts payable		$420,000		$129,600	[Ipay]	38,400				$511,200
Accrued Liabilities		240,000		110,400	[A]	2,400	[D]	1,200		349,200
Notes Payable		360,000		144,000						504,000
Common stock		432,000		144,000						432,000
APIC		1,008,000		576,000	[E]	144,000				1,008,000
EOY Retained earnings		1,380,000		720,000	[E]	576,000				1,676,640
Total Liabilities and Equity		$3,840,000		$1,824,000		$2,337,960		$2,337,960		$4,481,040