Chapter 5, Problem 58P

a.

To determine

Disaggregate and document the AAP 100 percent activity, the AAP controlling interest

and 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	2012		AAP	2013		AAP	2014		AAP	2015
100%	1/1/2012	Amort		12/31/2012	Amort		12/31/2013	Amort		12/31/2014	Amort
PPE, net	270,000	27,000		243,000	27,000		216,000	27,000		189,000	27,000
Patent	216,000	27,000		189,000	27,000		162,000	27,000		135,000	27,000
Goodwill	450,000	0		450,000	0		450,000	0		450,000	0
	936,000	54,000		882,000	54,000		828,000	54,000		774,000	54,000
p%
PPE, net	243,000	24,300		218,700	24,300		194,400	24,300		170,100	24,300
Patent	194,400	24,300		170,100	24,300		145,800	24,300		121,500	24,300
Goodwill	405,000	0		405,000	0		405,000	0		405,000	0
	842,400	48,600		793,800	48,600		745,200	48,600		696,600	48,600
nci%
PPE, net	27,000	2,700		24,300	2,700		21,600	2,700		18,900	2,700
Patent	21,600	2,700		18,900	2,700		16,200	2,700		13,500	2,700
Goodwill	45,000	0		45,000	0		45,000	0		45,000	0
	93,600	5,400		88,200	5,400		82,800	5,400		77,400	5,400

	Unamort			Unamort			Unamort			Unamort			Unamort
	AAP	2016		AAP	2017		AAP	2018		AAP	2019		AAP
100%	12/31/2015	Amort		12/31/2016	Amort		12/31/2017	Amort		12/31/2018	Amort		12/31/2019
PPE, net	162,000	27,000		135,000	27,000		108,000	27,000		81,000	27,000		54,000
Patent	108,000	27,000		81,000	27,000		54,000	27,000		27,000	27,000		0
Goodwill	450,000	0		450,000	0		450,000	0		450,000	0		450,000
	720,000	54,000		666,000	54,000		612,000	54,000		558,000	54,000		504,000
p%
PPE, net	145,800	24,300		121,500	24,300		97,200	24,300		72,900	24,300		48,600
Patent	97,200	24,300		72,900	24,300		48,600	24,300		24,300	24,300		0
Goodwill	405,000	0		405,000	0		405,000	0		405,000	0		405,000
	648,000	48,600		599,400	48,600		550,800	48,600		502,200	48,600		453,600
nci%
PPE, net	16,200	2,700		13,500	2,700		10,800	2,700		8,100	2,700		5,400
Patent	10,800	2,700		8,100	2,700		5,400	2,700		2,700	2,700		0
Goodwill	45,000	0		45,000	0		45,000	0		45,000	0		45,000
	72,000	5,400		66,600	5,400		61,200	5,400		55,800	5,400		50,400

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 1/1/19	64,800	0
		Intercompany profit on 12/31/19	81,000	0

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 1/1/19:
	p% x book value of the net assets of subsidiary	882,900
	Add: unamortized (p%) AAP	502,200
	Less: 100% of downstream deferred intercompany profits	(64,800)
	Less: p% of upstream deferred intercompany profits	0
		1,320,300
	Equity Investment account at 12/31/19:
	p% x book value of the net assets of subsidiary	915,300
	Add: unamortized (p%) AAP	453,600
	Less:  100% of downstream deferred intercompany profits	(81,000)
	Less:  p% of upstream deferred intercompany profits	0
		1,287,900

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 1/1/19	1,320,300
	p% Net Income	81,000	48,600	p% Dividends
	100% BOY D-S inventory profits	64,800	48,600	p% AAP Amortization
			81,000	100% EOY D-S inventory profits
	Equity Investment at 12/31/19	1,287,900

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 1/1/19:
	nci% of book value of the net assets of subsidiary	98,100
	Add: nci% unamortized AAP	55,800
		153,900
	Non-controlling interest at 12/31/19:
	nci% of book value of the net assets of subsidiary	101,700
	Add: nci% unamortized AAP	50,400
		152,100

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	540,000
	Plus:  100% realized downstream deferred profits	64,800
	Less:  100% unrealized downstream deferred profits	(81,000)
	Parent's adjusted stand-alone net income	523,800
	Subsidiary's stand-alone net income	90,000
	Less: 100% AAP amortization	(54,000)
	Subsidiary's adjusted stand-alone net income	36,000
	Consolidated net income	559,800
	Parent's stand-alone net income	540,000
	Plus:  100% realized downstream deferred profits	64,800
	Less:  100% unrealized downstream deferred profits	(81,000)
	Parent's adjusted stand-alone net income	523,800
	p% of subsidiary's stand-alone net income	81,000
	Less: p% AAP amortization	(48,600)
	p% of subsidiary's stand-alone net income	32,400
	Consolidated net income attributable to the controlling interest	556,200
	nci% of subsidiary's stand-alone net income	9,000
	Less: nci% AAP amortization	(5,400)
	Consolidated net income attributable to the non-controlling interest	3,600

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		$\$16,200$
	Consol. NI attributable to NCI		$\$3,600$
	Equity investment		$\$32,400$
	Non-controlling interest		$\$1,800$
	Dividends			$\$54,000$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$90,000$
	APIC (S) @BOY		$\$360,000$
	Retained Earnings (S) @BOY		$\$531,000$
	Equity Investment @BOY			$\$882,900$
	Non-controlling interest (@BOY)			$\$98,100$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  PPE, net @ BOY (100% AAP)		$\$81,000$
	Patent, net @ BOY (100% AAP)		$\$27,000$
	Goodwill @ BOY (100% AAP)		$\$450,000$
	Equity Investment @ BOY (AAP)			$\$502,200$
	Non-controlling interest			$\$55,800$
	(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.)		$\$54,000$
	PPE, net (for 100% AAP amort.)			$\$27,000$
	Patent, net @ BOY (100% AAP)			$\$27,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$64,800$
	Cost of goods sold			$\$64,800$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$405,000$
	Cost of goods sold			$\$405,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$81,000$
	Inventory			$\$81,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$36,000$
	Accounts receivable			$\$36,000$
	(Elimination of intercompany receivable and payable)

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr	Cr		Consol
Income Statement:
Sales	5,490,000	990,000	[Isales]	405,000			6,075,000
Cost of Goods sold	(4,140,000)	(630,000)	[Icogs]	81,000	405,000	[Isales]	(4,381,200)
					64,800	[Icogs]
Gross profit	1,350,000	360,000					1,693,800
Income (loss) from subsidiary	16,200		[C]	16,200			0
Operating expenses	(810,000)	(270,000)	[D]	54,000			(1,134,000)
Net Income	556,200	90,000					559,800
Consolidated NI attrib to NCI			[C]	3,600			(3,600)
Consolidated NI attrib to CI							556,200
Statement of Ret Earnings:
BOY retained earnings	1,811,700	531,000	[E]	531,000			1,811,700
Net income	556,200	90,000					556,200
Dividends	(180,000)	(54,000)			54,000	[C]	(180,000)
EOY retained earnings	2,187,900	567,000					2,187,900
Balance Sheet:
Cash	405,000	72,000					477,000
Accounts receivable	720,000	261,000			36,000	[Ipay]	945,000
Inventory	810,000	405,000			81,000	[Icogs]	1,134,000
Equity investment	1,287,900		[C]	32,400			0
			[Icogs]	64,800	882,900	[E]
					502,200	[A]
PPE, net	2,700,000	900,000	[A]	81,000	27,000	[D]	3,654,000
Patent			[A]	27,000	27,000	[D]	0
Goodwill			[A]	450,000			450,000
	5,922,900	1,638,000					6,660,000
Current liabilities	585,000	81,000	[Ipay]	36,000			630,000
Long-term liabilities	1,800,000	540,000					2,340,000
Common stock	450,000	90,000	[E]	90,000			450,000
APIC	900,000	360,000	[E]	360,000			900,000
Retained earnings	2,187,900	567,000					2,187,900
Non-controlling interest			[C]	1,800	98,100	[E]	152,100
					55,800	[A]
	5,922,900	1,638,000		2,233,800	2,233,800		6,660,000