Chapter 5, Problem 68P

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	2012	2013	2014	2015	2016
Accounts Rec.	(4,000)	(4,000)	-	-	-	-
PPE, net	28,000	2,800	2,800	2,800	2,800	2,800
Patents	24,000	4,000	4,000	4,000	4,000	4,000
Notes payable	4,800	1,200	1,200	1,200	1,200	-
Goodwill	11,200	-	-	-	-	-
Net	64,000	4,000	8,000	8,000	8,000	6,800
100% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(4,000)	-	-	-	-	-
PPE, net	28,000	25,200	22,400	19,600	16,800	14,000
Patents	24,000	20,000	16,000	12,000	8,000	4,000
Notes payable	4,800	3,600	2,400	1,200	-	-
Goodwill	11,200	11,200	11,200	11,200	11,200	11,200
Net	64,000	60,000	52,000	44,000	36,000	29,200

80% AAP Amortization		Amortized
	Allocation	2012	2013	2014	2015	2016
Accounts Rec.	(3,200)	(3,200)
PPE, net	22,400	2,240	2,240	2,240	2,240	2,240
Patents	19,200	3,200	3,200	3,200	3,200	3,200
Notes payable	3,840	960	960	960	960
Goodwill	9,600	-
Net	51,840	3,200	6,400	6,400	6,400	5,440
80% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(3,200)	-	-	-
PPE, net	22,400	20,160	17,920	15,680	13,440	11,200
Patents	19,200	16,000	12,800	9,600	6,400	3,200
Notes payable	3,840	2,880	1,920	960	-	-
Goodwill	9,600	9,600	9,600	9,600	9,600	9,600
Net	51,840	48,640	42,240	35,840	29,440	24,000

20% AAP Amortization		Amortized
	Allocation	2012	2013	2014	2015	2016
Accounts Rec.	(800)	(800)
PPE, net	5,600	560	560	560	560	560
Patents	4,800	800	800	800	800	800
Notes payable	960	240	240	240	240
Goodwill	1,600
Net	12,160	800	1,600	1,600	1,600	1,360
20% Unamortized AAP		Unamortized
	Allocation	12/31/2012	12/31/2013	12/31/2014	12/31/2015	12/31/2016
Accounts Rec.	(800)	-	-	-	-	-
PPE, net	5,600	5,040	4,480	3,920	3,360	2,800
Patents	4,800	4,000	3,200	2,400	1,600	800
Notes payable	960	720	480	240	-	-
Goodwill	1,600	1,600	1,600	1,600	1,600	1,600
Net	12,160	11,360	9,760	8,160	6,560	5,200

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 downstream asset sale:

Intercompany profit recognized on January 1, 2015:

$56,000 − $40,000 = $16,000, 5-year remaining life

Profit confirmed each year: $16,000 / 5 = $3,200

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2016	$12,800	$0
Less: Deferred intercompany profit recognized during 2016	(3,200)	0
Net intercompany profit deferred at December 31, 2016	$9,600	$0

Intercompany inventory transactions:

Intercompany inventory sales during 2016: $19,200

			Downstream	Upstream
		Intercompany profit on 1/1/16	$    0	$3,360
		Intercompany profit on 12/31/16	$4,480	$0

Intercompany accounts receivables and payables at December 31, 2016: $6,400.

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)
80% x book value of the net assets of subsidiary	153,600
Add: unamortized (80%) AAP	29,440
Deduct: Def. 100%*EOY D-S IIP	-
Deduct: Def. 80%*EOY U-S IIP	(2,688)
Deduct: Def 100%*EOY D-S Asset Gain	(12,800)
Deduct: Def 80%*EOY D-S Asset Gain	-
	167,552

Investment at 12/31/2016 (Equity)
80% x book value of the net assets of subsidiary	168,960
Add: unamortized (80%) AAP	24,000
Deduct: Def. 100%*EOY D-S IIP	(4,480)
Deduct: Def. 80%*EOY U-S IIP	-
Deduct: Def 100%*EOY D-S Asset Gain	(9,600)
Deduct: Def 80%*EOY U-S Asset Gain	-
	178,880

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.

80% of change in RE(S) from acquisition date through BOY		61,440
Less: Cum 80% AAP amort. from acquisition date through BOY		(22,400)
Less: 80% of the BOY U-S unconfirmed intercompany inventory profits		(2,688)
Less: 100% of the BOY D-S unconfirmed intercompany deprec. asset profits		(12,800)
[ADJ] Amount		23,552

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
20% of book value of the net assets of subsidiary	38,400
Add: 20% unamortized AAP	6,560
Deduct: Def. 20%*EOY IIP	(672)
	44,288

NCI at 12/31/2016
20% of book value of the net assets of subsidiary	42,240
Add: 20% unamortized AAP	5,200
	47,440

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	57,600
Plus: 100% realized downstream deferred profits	3,200
Less: 100% unrealized downstream deferred profits	(4,480)
Parent’s adjusted stand-alone net income	56,320
Subsidiary’s stand-alone net income	35,200
Plus: 100% realized upstream deferred profits	3,360
Less: 100% AAP amortization	(6,800)
Subsidiary’s adjusted stand-alone net income	31,760
Consolidated net income	88,080
Parent’s stand-alone net income	57,600
Plus: 100% realized downstream deferred profits	3,200
Less: 100% unrealized downstream deferred profits	(4,480)
Parent’s adjusted stand-alone net income	56,320
80% x subsidiary’s stand-alone net income	28,160
Plus: 80% realized upstream deferred profits	2,688
Less: 80% AAP amortization (from schedule)	(5,440)
80% of the Subsidiary’s adjusted stand-alone net income	25,408
Consolidated net income attributable to the CI	81,728
20% x subsidiary’s stand-alone net income	7,040
Plus: 20% realized upstream deferred profits	672
Less: 20% AAP amortization (from schedule)	(1,360)
Consolidated net income attributable to the NCI	6,352

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 in subsidiary		$\$23,552$
	Retained earnings of Parent - BOY			$\$23,552$
	[C] Equity income from subsidiary		$\$12,800$
	Income attributable to NCI		$\$6,352$
	Dividends-Subsidiary			$\$3,152$
	Non-controlling interest			$\$16,000$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$104,000$
	Retained Earnings (S) @BOY		$\$88,000$
	Equity Investment @BOY			$\$153,600$
	Non-controlling interest (@BOY)			$\$38,400$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Buildings and net @ BOY (100% AAP)		$\$16,800$
	Patents, net @ BOY (100% AAP)		$\$8,000$
	Goodwill		$\$11,200$
	Equity Investment @ BOY			$\$29,440$
	Non-controlling interest @ BOY			$\$6,560$
	(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 and Amortization expense		$\$6,800$
	Buildings and Equipment, net			$\$2,800$
	Patents			$\$4,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment in subsidiary @ BOY		$\$2,688$
	Non-controlling interest		$\$672$
	Cost of goods sold			$\$3,360$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$19,200$
	Cost of goods sold			$\$19,200$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$4,480$
	Inventories			$\$4,480$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$6,400$
	Accounts receivable			$\$6,400$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$12,800$
	Buildings and Equipment, net @ BOY			$\$12,800$
	[Idep] Buildings and Equipment, net		$\$3,200$
	Depreciation Expense			$\$3,200$

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr		Cr	Consol
Income Statement
Sales	368,000	160,000	[Isales]	19,200			508,800
Cost of Goods Sold	(192,000)	(94,400)	[Icogs]	4,480	[Icogs]	3,360	(268,320)
					[Isales]	19,200
Gross Profit	176,000	65,600					240,480
Depreciation & Amort Expense	(9,600)	(7,680)	[D]	6,800	[Idep]	3,200	(20,880)
Operating Expenses	(104,000)	(21,040)					(125,040)
Interest Expense	(4,800)	(1,680)					(6,480)
Total expenses	(118,400)	(30,400)					(152,400)
Income (loss) from Subsidiary	12,800	-	[C]	12,800			-
Consolidated Net Income	70,400	35,200					88,080
Consolidated NI attrib to NCI	-	-	[C]	6,352			(6,352)
Consolidated NI attrib to CI	70,400	35,200					81,728
Statement of Ret Earnings:
Beg. Ret. Earnings	174,640	88,000	[E]	88,000	[ADJ]	23,552	198,192
Consolidated NI attrib to CI	70,400	35,200					81,728
Dividends Declared	(48,000)	(16,000)			[C]	16,000	(48,000)
Ending Retained Earnings	197,040	107,200					231,920
Balance Sheet
Cash	34,640	12,000					46,640
Accounts receivable	43,200	38,400			[Ipay]	6,400	75,200
Inventories	104,000	36,800			[Icogs]	4,480	136,330
PPE, net	100,800	88,000	[A]	16,800	[D]	2,800	193,200
			[Idep]	3,200	[Igain]	12,800
Other assets	45,600	80,000					125,600
Patents	-	8,000	[A]	8,000	[D]	4,000	12,000
Equity Investment	144,000		[ADJ]	23,552	[E]	153,600	0
			[Icogs]	2,688	[A]	29,440
			[Igain]	12,800
Goodwill			[A]	11,200			11,200
Total Assets	472,240	263,200					600,160
Accounts Payable	25,600	14,400	[Ipay]	6,400			33,600
Notes Payable	40,000	16,800					56,800
Other liabilities	17,600	20,800					38,400
Common Stock	192,000	104,000	[E]	104,000			192,000
Retained Earnings	197,040	107,200					231,920
Non-controlling Interest	-	-	[Icogs]	672	[C]	3,152	47,440
					[E]	38,400
					[A]	6,560
Total Liabilities and Equity	472,240	263,200		326,944		326,944	600,160