Chapter 5, Problem 56P

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	200,000	20,000		180,000	20000		160,000	20,000		140,000	20,000
Goodwill	350,000	0		350,000	0		350,000	0		350,000	0
	550,000	20,000		530,000	20,000		510,000	20,000		490,000	20,000
75%
Patent	150,000	15,000		135,000	15,000		120,000	15,000		105,000	15,000
Goodwill	262,500	0		262,500	0		262,500	0		262,500	0
	412,500	15,000		397,500	15,000		382,500	15,000		367,500	15,000
25%
Patent	50,000	5,000		45,000	5,000		40,000	5,000		35,000	5,000
Goodwill	87,500	0		87,500	0		87,500	0		87,500	0
	137,500	5,000		132,500	5,000		127,500	5,000		122,500	5,000

	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	120,000	20,000		100,000	20,000		80,000	20,000		60,000
Goodwill	350,000	0		350,000	0		350,000	0		350,000
	470,000	20,000		450,000	20,000		430,000	20,000		410,000
75%
Patent	90,000	15,000		75,000	15,000		60,000	15,000		45,000
Goodwill	262,500	0		262,500	0		262,500	0		262,500
	352,500	15,000		337,500	15,000		322,500	15,000		307,500
25%
Patent	30,000	5,000		25,000	5,000		20,000	5,000		15,000
Goodwill	87,500	0		87,500	0		87,500	0		87,500
	117,500	5,000		112,500	5,000		107,500	5,000		102,500

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	$25,000
		Intercompany profit on 12/31/16	0	$42,000

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.

	Equity Investment account at 1/1/16:
	75% x book value of the net assets of subsidiary	1,005,000
	Add: unamortized (75%) AAP	322,500
	Less: 75% of upstream deferred intercompany profits	(18,750)
		1,308,750
	Equity Investment account at 12/31/16:
	75% x book value of the net assets of subsidiary	1,125,000
	Add: unamortized (75%) AAP	307,500
	Less:  75% of upstream deferred intercompany profits	(31,500)
		1,401,000

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
	Equity Investment at 1/1/16	1,308,750
	75% Net Income	150,000	30,000	75% Dividends
	75% BOY U-s inventory profits	18,750	15,000	75% AAP Amortization
			31,500	75% EOY U-S inventory profits
	Equity Investment at 12/31/19	1,401,000

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.

	Non-controlling interest at 1/1/16:
	nci% of book value of the net assets of subsidiary	335,000
	Add: nci% unamortized AAP	107,500
	Less: nci% of upstream deferred intercompany profits	(6,250)
		436,250
	Non-controlling interest at 12/31/19:
	25% of book value of the net assets of subsidiary	375,000
	Add: 25% unamortized AAP	102,500
	Less: 25% of upstream deferred intercompany profits	(10,500)
		467,000

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	200,000
	Subsidiary's stand-alone net income	200,000
	Plus:  100% realized upstream deferred profits	25,000
	Less: 100% unrealized upstream deferred profits	(42,000)
	Less: 100% AAP amortization	(20,000)
	Consolidated net income	363,000
	Parent's stand-alone net income	200,000
	75% of subsidiary's stand-alone net income	150,000
	Plus: 75% realized upstream deferred profits	18,750
	Less: 75% unrealized upstream deferred profits	(31,500)
	Less: 75% AAP amortization	(15,000)
	Consolidated net income attributable to the controlling interest	322,250
	25% of subsidiary's stand-alone net income	50,000
	Plus:  25% realized upstream deferred profits	6,250
	Less: 25% unrealized upstream deferred profits	(10,500)
	Less: 25% AAP amortization	(5,000)
	Consolidated net income attributable to the non-controlling interest	40,750

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		$\$122,250$
	Consol. NI attributable to NCI		$\$40,750$
	Dividends			$\$40,000$
	Equity investment			$\$92,250$
	Non-controlling interest			$\$30,750$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$140,000$
	APIC (S) @BOY		$\$200,000$
	Retained Earnings (S) @BOY		$\$100,000$
	Equity Investment @BOY			$\$1,005,000$
	Non-controlling interest (@BOY)			$\$335,000$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Patent, net @ BOY (100% AAP)		$\$80,000$
	Goodwill, net @ BOY (100% AAP)		$\$350,000$
	Equity Investment @ BOY (AAP)			$\$322,500$
	Non-controlling interest			$\$107,500$
	(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.)		$\$20,000$
	Patent, net (for 100% AAP amort.)			$\$20,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$18,750$
	Non-controlling interest @BOY		$\$6,250$
	Cost of goods sold			$\$25,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$700,000$
	Cost of goods sold			$\$700,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$42,000$
	Inventory			$\$42,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$120,000$
	Accounts receivable			$\$120,000$
	(Elimination of intercompany receivable and payable)

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr	Cr		Consol
Income Statement:
Sales	6,700,000	2,500,000	[Isales]	700,000			8,500,000
Cost of Goods sold	(4,500,000)	(1,500,000)	[Icogs]	42,000	700,000	[Isales]	(5,317,000)
					25,000	[Icogs]
Gross profit	2,200,000	1,000,000					3,183,000
Income (loss) from subsidiary	122,250		[C]	122,250			0
Operating expenses	(2,000,000)	(800,000)	[D]	20,000			(2,820,000)
Net Income	322,250	200,000					363,000
Consolidated NI attrib to NCI			[C]	40,750			(40,750)
Consolidated NI attrib to CI							322,250
Statement of Ret Earnings:
BOY retained earnings	2,000,000	1,000,000	[E]	1,000,000			2,000,000
Net income	322,250	200,000					322,250
Dividends	(200,000)	(40,000)			40,000	[C]	(200,000)
EOY retained earnings	2,122,250	1,160,000					2,122,250
Balance Sheet:
Cash	600,000	400,000					1,000,000
Accounts receivable	800,000	600,000			120,000	[Ipay]	1,280,000
Inventory	1,000,000	800,000			42,000	[Icogs]	1,758,000
Equity investment	1,401,000		[Icogs]	18,750	92,250	[C]	0
					1,005,000	[E]
					322,500	[A]
PPE, net	3,700,000	1,000,000					4,700,000
Patent			[A]	80,000	20,000	[D]	60,000
Goodwill			[A]	350,000			350,000
	7,501,000	2,800,000					9,148,000
Current liabilities	878,750	500,000	[Ipay]	120,000			1,258,750
Long-term liabilities	3,000,000	800,000					3,800,000
Common stock	500,000	140,000	[E]	140,000			500,000
APIC	1,000,000	200,000	[E]	200,000			1,000,000
Retained earnings	2,122,250	1,160,000					2,122,250
Non-controlling interest			[Icogs]	6,250	30,750	[C]	467,000
					335,000	[E]
					107,500	[A]
	7,501,000	2,800,000		2,840,000	2,840,000		9,148,000