ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
4th Edition
ISBN: 9781618533128
Author: Halsey
Publisher: Cambridge Business Publishers
Question
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Chapter 5, Problem 56P

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.

a.

Expert Solution
Check Mark

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.

UnamortUnamortUnamortUnamort
AAP2013AAP2014AAP2015AAP2016
100%1/1/2013Amort12/31/2013Amort12/31/2014Amort12/31/2015Amort
Patent180,00018,000162,00018,000144,00018,000126,00018,000
Goodwill300,0000300,0000300,0000300,0000
480,00018,000462,00018,000444,00018,000426,00018,000
p%
Patent144,00014,400129,60014,400115,20014,400100,80014,400
Goodwill240,0000240,0000240,0000240,0000
384,00014,400369,60014,400355,20014,400340,80014,400
nci%
Patent36,0003,60032,4003,60028,8003,60025,2003,600
Goodwill60,000060,000060,000060,0000
96,0003,60092,4003,60088,8003,60085,2003,600
           
UnamortUnamortUnamortUnamort
AAP2017AAP2018AAP2019AAP
100%12/31/2016Amort12/31/2017Amort12/31/2018Amort12/31/2019
Patent108,00018,00090,00018,00072,00018,00054,000
Goodwill300,0000300,0000300,0000300,000
408,00018,000390,00018,000372,00018,000354,000
p%
Patent86,40014,40072,00014,40057,60014,40043,200
Goodwill240,0000240,0000240,0000240,000
326,40014,400312,00014,400297,60014,400283,200
nci%
Patent21,6003,60018,0003,60014,4003,60010,800
Goodwill60,000060,000060,000060,000
81,6003,60078,0003,60074,4003,60070,800

b.

To determine

Calculate and organize the profits and losses on intercompany transactions and balances.

b.

Expert Solution
Check Mark

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.

     
   DownstreamUpstream
  Intercompany profit on 1/1/19028,000
  Intercompany profit on 12/31/19037,500

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.

c.

Expert Solution
Check Mark

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 subsidiary992,000
Add: unamortized (p%) AAP297,600
Less: p% of upstream deferred intercompany profits(22,400)
1,267,200
Equity Investment account at 12/31/19:
p% x book value of the net assets of subsidiary1,120,000
Add: unamortized (p%) AAP283,200
Less:  p% of upstream deferred intercompany profits(30,000)
1,373,200

d.

To determine

Reconstruction of the pre-consolidation activities of the parent Equity Investment T-

account for the year of consolidation.

d.

Expert Solution
Check Mark

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 1/1/191,267,200  
 p% Net Income160,00032,000p% Dividends
 p% BOY U-s inventory profits22,40014,400p% AAP Amortization
   30,000p% EOY U-S inventory profits
 Equity Investment at 12/31/191,373,200  

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.

e.

Expert Solution
Check Mark

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 subsidiary248,000
Add: nci% unamortized AAP74,400
Less: nci% of upstream deferred intercompany profits(5,600)
316,800
Non-controlling interest at 12/31/19:
nci% of book value of the net assets of subsidiary280,000
Add: nci% unamortized AAP70,800
Less: nci% of upstream deferred intercompany profits(7,500)
343,300

f.

To determine

Calculate consolidated net income, controlling interest net income and non-controlling

interest net income.

f.

Expert Solution
Check Mark

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 income200,000
Subsidiary's stand-alone net income200,000
Plus:  100% realized upstream deferred profits28,000
Less: 100% unrealized upstream deferred profits(37,500)
Less: 100% AAP amortization(18,000)
Consolidated net income372,500
Parent's stand-alone net income200,000
p% of subsidiary's stand-alone net income160,000
Plus:  p% realized upstream deferred profits22,400
Less: p% unrealized upstream deferred profits(30,000)
Less: p% AAP amortization(14,400)
Consolidated net income attributable to the controlling interest338,000
nci% of subsidiary's stand-alone net income40,000
Plus:  nci% realized upstream deferred profits5,600
Less: nci% unrealized upstream deferred profits(7,500)
Less: nci% AAP amortization(3,600)
Consolidated net income attributable to the noncontrolling interest34,500

g.

To determine

Complete the C-E-A-D-I consolidation entries and execute the consolidation worksheet.

g.

Expert Solution
Check Mark

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:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 [C] Equity investment income $138,000 
 Consol. NI attributable to NCI $34,500 
 Dividends  $40,000
 Equity investment  $106,000
 Non-controlling interest  $26,500
 (Eliminates the change in the investment account  of AAP adjusted changes in SE(S))   
     
 [E]  Common Stock (S) @ BOY $100,000 
                  APIC (S) @BOY $200,000 
 Retained Earnings (S) @BOY $940,000 
 Equity Investment @BOY  $992,000
 Non-controlling interest (@BOY)  $248,000
 (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) $72,000 
 Goodwill, net @ BOY (100% AAP) $300,000 
 Equity Investment @ BOY (AAP)  $297,600
 Non-controlling interest  $74,400
 (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.) $18,000 
 Patent, net (for 100% AAP amort.)  $18,000
 

(To record depreciation and amortization expense for the AAP assets)

   
     
 [Icogs] Equity investment $22,400 
 Non-controlling interest @BOY $5,600 
 Cost of goods sold  $28,000
 (Recognition of deferred gain on inventory sale and proration between parent and subsidiary)   
     
 [Isales] Sales $600,000 
 Cost of goods sold  $600,000
 (Elimination of 100% of all intercompany transactions)   
     
 [Icogs] Cost of goods sold $37,500 
 Inventory  $37,500
 (Deferral of gross profit on this year inventory sales)   
     
 [Ipay] Accounts payable $140,000 
 Accounts receivable  $140,000
 (Elimination of intercompany receivable and payable)   

The consolidated spreadsheet is shown below:

ParentSubsidiaryDrCrConsol
Income Statement:
Sales6,700,0002,500,000[Isales]600,0008,600,000
Cost of Goods sold(4,500,000)(1,500,000)[Icogs]37,500600,000[Isales](5,409,500)
     28,000[Icogs] 
Gross profit2,200,0001,000,000  3,190,500
Income (loss) from subsidiary138,000[C]138,0000
Operating expenses(2,000,000)(800,000)[D]18,000(2,818,000)
Net Income338,000200,000372,500
Consolidated NI attrib to NCI[C]34,500(34,500)
Consolidated NI attrib to CI338,000
Statement of Ret Earnings:
BOY retained earnings2,035,200940,000[E]940,0002,035,200
Net income338,000200,000338,000
Dividends(200,000)(40,000)40,000[C](200,000)
EOY retained earnings2,173,2001,100,0002,173,200
Balance Sheet:
Cash500,000400,000900,000
Accounts receivable700,000600,000140,000[Ipay]1,160,000
Inventory900,000800,00037,500[Icogs]1,662,500
Equity investment1,373,200[Icogs]22,400106,000[C]0
992,000[E]
297,600[A]
PPE, net4,000,0001,000,0005,000,000
Patent[A]72,00018,000[D]54,000
Goodwill[A]300,000300,000
7,473,2002,800,0009,076,500
Current liabilities800,000500,000[Ipay]140,0001,160,000
Long-term liabilities3,000,000900,0003,900,000
Common stock500,000100,000[E]100,000500,000
APIC1,000,000200,000[E]200,0001,000,000
Retained earnings2,173,2001,100,0002,173,200
Non-controlling interest[Icogs]5,60026,500[C]343,300
248,000[E]
74,400[A]
7,473,2002,800,0002,608,0002,608,0009,076,500

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