Chapter 5, Problem 59P

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	2013		AAP	2014		AAP	2015		AAP	2016
100%	1/1/2013	Amort		12/31/2013	Amort		12/31/2014	Amort		12/31/2015	Amort
Patent	240,000	24,000		216,000	24,000		192,000	24,000		168,000	24,000
Goodwill	300,000	0		300,000	0		300,000	0		300,000	0
	540,000	24,000		516,000	24,000		492,000	24,000		468,000	24,000
p%
Patent	180,000	18,000		162,000	18,000		144,000	18,000		126,000	18,000
Goodwill	225,000	0		225,000	0		225,000	0		225,000	0
	405,000	18,000		387,000	18,000		369,000	18,000		351,000	18,000
nci%
Patent	60,000	6,000		54,000	6,000		48,000	6,000		42,000	6,000
Goodwill	75,000	0		75,000	0		75,000	0		75,000	0
	135,000	6,000		129,000	6,000		123,000	6,000		117,000	6,000

	Unamort			Unamort			Unamort			Unamort
	AAP	2017		AAP	2018		AAP	2019		AAP
100%	12/31/2016	Amort		12/31/2017	Amort		12/31/2018	Amort		12/31/2019
Patent	144,000	24,000		120,000	24,000		96,000	24,000		72,000
Goodwill	300,000	0		300,000	0		300,000	0		300,000
	444,000	24,000		420,000	24,000		396,000	24,000		372,000
p%
Patent	108,000	18,000		90,000	18,000		72,000	18,000		54,000
Goodwill	225,000	0		225,000	0		225,000	0		225,000
	333,000	18,000		315,000	18,000		297,000	18,000		279,000
nci%
Patent	36,000	6,000		30,000	6,000		24,000	6,000		18,000
Goodwill	75,000	0		75,000	0		75,000	0		75,000
	111,000	6,000		105,000	6,000		99,000	6,000		93,000

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	0	32,000
		Intercompany profit on 12/31/19	0	36,000

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 A/C at 1/1/19:
	p% x book value of the net assets of subsidiary	660,000
	Add: unamortized (p%) AAP	297,000
	Less: 100% of downstream deferred intercompany profits	0
	Less: p% of upstream deferred intercompany profits	(24,000)
		933,000
	Equity Investment A/C at 12/31/19:
	p% x book value of the net assets of subsidiary	750,000
	Add: unamortized (p%) AAP	279,000
	Less:  100% of downstream deferred intercompany profits	0
	Less:  p% of upstream deferred intercompany profits	(27,000)
		1,002,000

d.

To determine

Compute the amount of the [ADJ] consolidating entry.

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.

	Computation of [ADJ] amount
	p% of change in RE(S) from acquisition date through BOY	165,000
	Less: Cum p% AAP amort. from acquisition date through BOY	(108,000)
	Less: 100% of the BOY D-S unconf. intercompany inventory profits	0
	Less: p% of the BOY U-S unconf intercompany inventory profits	(24,000)
	Less: 100% of the BOY D-S unconf. intercompany deprec. asset profits	0
	Less: p% of the BOY U-S unconf. intercompany deprec. asset profits	0
	[ADJ] Amount	33,000

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.

	Noncontrolling interest at 1/1/19:
	nci% of book value of the net assets of subsidiary	220,000
	Add: nci% unamortized AAP	99,000
	Less: 10% of upstream deferred intercompany profits	(8,000)
		311,000
	Noncontrolling interest at 12/31/19:
	nci% of book value of the net assets of subsidiary	250,000
	Add: nci% unamortized AAP	93,000
	Less: 10% of upstream deferred intercompany profits	(9,000)
		334,000

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	600,000
	Subsidiary's stand-alone net income	200,000
	Plus:  100% realized upstream deferred profits	32,000
	Less: 100% unrealized upstream deferred profits	(36,000)
	Less: 100% AAP amortization	(24,000)
	Subsidiary's adjusted stand-alone net income	172,000
	Consolidated net income	772,000
	Parent's stand-alone net income	600,000
	p% of subsidiary's stand-alone net income	150,000
	Plus:  p% realized upstream deferred profits	24,000
	Less: p% unrealized upstream deferred profits	(27,000)
	Less: p% AAP amortization	(18,000)
	p% of subsidiary's stand-alone net income	129,000
	Consolidated net income attributable to the controlling interest	729,000
	nci% of subsidiary's stand-alone net income	50,000
	Plus:  nci% realized upstream deferred profits	8,000
	Less: nci% unrealized upstream deferred profits	(9,000)
	Less: nci% AAP amortization	(6,000)
	Consolidated net income attributable to the non-controlling interest	43,000

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 ($)	Credit ($)
	[ADJ]  Equity Investment		$\$33,000$
	Retained earnings of Parent - BOY			$\$33,000$
	[C] Equity investment income		$\$60,000$
	Consol. NI attributable to NCI		$\$43,000$
	Dividends			$\$80,000$
	Non-controlling interest			$\$23,000$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$140,000$
	APIC (S) @BOY		$\$300,000$
	Retained Earnings (S) @BOY		$\$440,000$
	Equity Investment @BOY			$\$660,000$
	Non-controlling interest (@BOY)			$\$220,000$
	(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)		$\$96,000$
	Patent, net @ BOY (100% AAP)		$\$300,000$
	Equity Investment @ BOY (AAP)			$\$297,000$
	Non-controlling interest			$\$99,000$
	(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  Operating expenses (for 100% AAP amort.)		$\$24,000$
	Patent, net @ BOY (100% AAP)			$\$24,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment		$\$24,000$
	Non-controlling interest		$\$8,000$
	Cost of goods sold			$\$32,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$800,000$
	Cost of goods sold			$\$800,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$36,000$
	Inventory			$\$36,000$
	(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	5,700,000	2,000,000	[Isales]	800,000			6,900,000
Cost of Goods sold	(3,500,000)	(1,200,000)	[Icogs]	36,000	800,000	[Isales]	(3,904,000)
					32,000	[Icogs]
Gross profit	2,200,000	800,000					2,996,000
Income (loss) from subsidiary	60,000		[C]	60,000			0
Operating expenses	(1,600,000)	(600,000)	[D]	24,000			(2,224,000)
Net Income	660,000	200,000					772,000
Consolidated NI attrib to NCI			[C]	43,000			(43,000)
Consolidated NI attrib to CI							729,000
Statement of Ret Earnings:
BOY retained earnings	340,000	440,000	[E]	440,000	33,000	[ADJ]	373,000
Net income	660,000	200,000					729,000
Dividends	(200,000)	(80,000)			80,000	[C]	(200,000)
EOY retained earnings	800,000	560,000					902,000
Balance Sheet:
Cash	500,000	350,000					850,000
Accounts receivable	700,000	550,000			120,000	[Ipay]	1,130,000
Inventory	900,000	700,000			36,000	[Icogs]	1,564,000
Equity investment	900,000		[ADJ]	33,000	660,000	[E]	0
			[Icogs]	24,000	297,000	[A]
PPE, net	3,400,000	900,000					4,300,000
Patent			[A]	96,000	24,000	[D]	72,000
Goodwill			[A]	300,000			300,000
	6,400,000	2,500,000					8,216,000
Current liabilities	1,300,000	800,000	[Ipay]	120,000			1,980,000
Long-term liabilities	2,800,000	700,000					3,500,000
Common stock	300,000	140,000	[E]	140,000			300,000
APIC	1,200,000	300,000	[E]	300,000			1,200,000
Retained earnings	800,000	560,000					902,000
Non-controlling interest			[Icogs]	8,000	23,000	[C]	334,000
					220,000	[E]
					99,000	[A]
	6,400,000	2,500,000		2,424,000	2,424,000		8,216,000