Chapter 5, Problem 67P

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	2017	2018	2019
Inventories	50,000	50,000	-	-
Intang. Asset	300,000	30,000	30,000	30,000
Bargain Purchase	(70,000)	(70,000)	-	-
Net	280,000	10,000	30,000	30,000
100% Unamortized AAP		Unamortized
	Allocation	12/31/2017	12/31/2018	12/31/2019
Inventories	50,000	-	-	-
Intang. Asset	300,000	270,000	240,000	210,000
Bargain Purchase	(70,000)	-	-	-
Net	280,000	270,000	240,000	210,000

Because ASC 805-30-25-2 requires that 100% of the bargain purchase gain is allocated to the controlling interest, the elements of the NCI AAP have to be adjusted downward for the NCI portion of the bargain purchase gain that was allocated to the parent company.  Recall that, on the acquisition date, the FV of the NCI was $270,000. If we simply take the NCI% portion of the AAP assigned to the inventories and intangible and add that to the NCI% x BVNA(S), then we will arrive at an amount greater than the FV of the NCI.  Specifically, nci% times the inventory AAP is $15,000 (i.e., $50,000 x nci%) and nci% times the intangible asset AAP is $90,000 ($300,000 x nci%).  So, if we mechanically determine the NCI by adding up the components (without adjustment), we arrive at an acquisition-date reported value of $285,000 (i.e., (nci% x $600,000) + $15,000 + $90,000).  Of course, this is not acceptable because the FV of the NCI is only $270,000 on the acquisition date (and the illustration in FASB ASC 805-30-55-14 through -06 clearly presents the NCI at FV after recording the bargain purchase gain).  To solve this problem, we allocate the $15,000 excess over FV of the NCI (i.e., $285,000 − $270,000) to the NCI portion of the inventories and the intangible asset by decreasing those allocations.  To make sure the 100% values for the identifiable net assets reflect acquisition date fair values (i.e., as list d in the table above), we will need to make corresponding increases to the allocations made to the p% allocations.  This process is illustrated, as follows (on the acquisition date, immediately following the recording of the bargain purchase gain): 

Adjusted AAP assigned to the p% and nci% portions: 

	100%	Unadjusted	Unadjusted		ADJUSTED	ADJUSTED
	AAP	nci% AAP	p% AAP	Adjustment*	nci% AAP	p% AAP
Inventories	50,000	15,000	35,000	(2,143)	12,857	37,143
Intang. Asset	300,000	90,000	210,000	(12,857)	77,143	222,857
Net	350,000	105,000	245,000	(15,000)	90,000	260,000

*Adjustment:     Inventories: [$15,000/$105,000] x $(15,000) = $(2,143)

Intang. Asset: [$90,000/$105,000] x $(15,000) = $(12,857)

ADJUSTED p% AAP Amortization		Amortized
	Allocation	2017	2018	2019
Inventories	37,143	37,143	-	-
Intang. Asset	222,857	22,286	22,286	22,286
Bargain Purchase	(70,000)	(70,000)	-	-
Net	190,000	(10,571)	22,286	22,286
ADJUSTED p% Unamortized AAP		Unamortized
	Allocation	12/31/2017	12/31/2018	12/31/2019
Inventories	37,143	-	-	-
Intang. Asset	222,857	200,571	178,286*	156,000*
Bargain Purchase	(70,000)	-	-	-
Net	190,000	200,571	178,286*	156,000*

ADJUSTED nci% AAP Amortization		Amortized
	Adjusted NCI
	Allocation	2017	2018	2019
Inventories	12,857	12,857	-	-
Intang. Asset	77,143	7,714	7,714	7,714
Bargain Purchase	-	-	-	-
Net	90,000	20,571	7,714	7,714
ADJUSTED nci% Unamortized AAP		Unamortized
	Adjusted NCI
	Allocation	12/31/2017	12/31/2018	12/31/2019
Inventories	12,857	-	-	-
Intang. Asset	77,143	69,429	61,714*	54,000*
Bargain Purchase	-	-	-	-
Net	90,000	69,429	61,714*	54,000*

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.

Intercompany depreciable asset sale:

One upstream asset sale:

Intercompany profit recognized on January 1, 2018:

$100,000, 10-year remaining life.

Profit confirmed each year: $100,000 /10 =  $10,000

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2019	$0	$90,000
Less: Deferred intercompany profit recognized during 2019	0	(10,000)
Net intercompany profit deferred at December 31, 2019	$0	$80,000

Intercompany inventory transactions:

Intercompany inventory sales during 2019:  $200,000

  

	Downstream (in Sub’s inventory)	Upstream (in Parent’s inventory)
Intercompany profit in inventory on January 1, 2019	$14,000	$0
Intercompany profit in inventory on December 31, 2019	$21,000	$0

Intercompany accounts receivables and payables at December 31, 2019: 50,000

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.

Investment at 1/1/2019
p% x book value of the net assets of subsidiary	700,000
Add: unamortized (p%) AAP	178,286
-Def. 100%*EOY D-S IIP	(14,000)
-Def. p%*EOY U-S IIP	-
-Def 100%*EOY D-S Asset Gain	(63,000)
-Def p%*EOY D-S Asset Gain	-
	801,286

Investment at 12/31/2019
p% x book value of the net assets of subsidiary	735,000
Add: unamortized (p%) AAP	156,000
-Def. 100%*EOY D-S IIP	(21,000)-
-Def. p%*EOY U-S IIP	-
-Def 100%*EOY D-S Asset Gain	-
-Def p%*EOY U-S Asset Gain	(56,000)
	814,000

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
January 1, 2019	801,286
(1)    p% x net income of Sub. = p% x $100,000	70,000	35,000	(2)    p% x dividends of Sub. = p% x $50,000
(4)    100% x downstream inventory  profits recognized during 2019	14,000	22,286	(3)    p% AAP amortization (see part b)
(4)    p% x upstream equipment  profits recognized via depreciation during 2019	7,000	21,000	(4)    100% x downstream inventory  profits deferred until year of sale to unaffiliated party
December 31, 2019	814,000

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.

NCI at 1/1/2019
nci% of book value of the net assets of subsidiary	300,000
Add: nci% unamortized AAP	61,714
Less: Def nci%*EOY Asset Gain	(27,000)
	334,714

NCI at 12/31/2019
nci% of book value of the net assets of subsidiary	315,000
Add: nci% unamortized AAP	54,000
-Def nci%*EOY Asset Gain	(24,000)
	345,000

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	300,000
Plus: 100% realized downstream deferred profits	14,000
Less: 100% unrealized downstream deferred profits	(21,000)
Parent’s adjusted stand-alone net income	293,000
Subsidiary’s stand-alone net income	100,000
Plus: 100% realized upstream deferred profits	10,000
Less: 100% AAP amortization	(30,000)
Subsidiary’s adjusted stand-alone net income	80,000
Consolidated net income	373,000
Parent’s stand-alone net income	300,000
Plus: 100% realized downstream deferred profits	14,000
Less: 100% unrealized downstream deferred profits	(21,000)
Parent’s adjusted stand-alone net income	293,000
p% x subsidiary’s stand-alone net income	70,000
Plus: p% realized upstream deferred profits	7,000
Less: p% AAP amortization	(22,286)
p% x subsidiary’s adjusted stand-alone net income	54,714
Consolidated net income attributable to the CI	347,714
nci% x subsidiary’s stand-alone net income	30,000
Plus: nci% realized upstream deferred profits	3,000
Less: nci% AAP amortization	(7,714)
Consolidated net income attributable to the NCI	25,286

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		$\$47,714$
	Consol. NI attributable to NCI		$\$25,286$
	Dividends			$\$50,000$
	Equity investment			$\$12,714$
	Non-controlling interest			$\$10,286$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$500,000$
	Retained Earnings (S) @BOY		$\$500,000$
	Equity Investment @BOY			$\$700,000$
	Non-controlling interest (@BOY)			$\$300,000$
	(Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the beginning investment account)
	[A]  Intangible assets @ BOY		$\$240,000$
	Equity Investment @ BOY			$\$178,286$
	Non-controlling interest @ BOY			$\$61,714$
	(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 & Amortization expense		$\$30,000$
	Intangible assets			$\$30,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment @ BOY		$\$14,000$
	Cost of goods sold			$\$14,000$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$200,000$
	Cost of goods sold			$\$200,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$21,000$
	Inventories			$\$21,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$50,000$
	Accounts receivable			$\$50,000$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$63,000$
	Non-controlling interest (@BOY)		$\$27,000$
	Buildings and Equipment, net @ BOY			$\$90,000$
	[Idep] Buildings and Equipment, net		$\$10,000$
	Depreciation Expense			$\$10,000$

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr		Cr	Consol
Income Statement
Sales	200,000	750,000	[Isales]	200,000			2,550,000
Cost of Goods Sold	(1,000,000)	(450,000)	[Icogs]	21,000	[Icogs]	14,000	(1,257,000)
					[Isales]	200,000
Gross Profit	1,000,000	300,000					1,293,000
Depreciation & Amort Expense	(50,000)	(40,000)	[D]	30,000	[Idep]	10,000	(110,000)
Operating Expenses	(650,000)	(160,000)					(810,000)
Total expenses	(700,000)	(200,000)					(920,000)
Income (loss) from Subsidiary	47,714	-	[C]	47,714			-
Consolidated Net Income	347,714	100,000					373,000
Consolidated NI attrib to NCI	-	-	[C]	25,286			(25,286)
Consolidated NI attrib to CI	347,714	100,000					347,714
Statement of Ret Earnings:
Beg. Ret. Earn	681,786	500,000	[E]	500,000			681,786-
Consolidated NI attrib to CI	347,714	100,000					347,714
Dividends Declared	(300,000)	(50,000)			[C]	50,000	(300,000)
Ending Retained Earnings	729,500	550,000					729,500
Balance Sheet
Cash	78,000	100,000					178,000
Accounts receivable	100,000	200,000			[Ipay]	50,000	250,000
Inventories	500,000	150,000			[Icogs]	21,000	629,000
Buildings and Equipment, net	400,000	300,000	[Idep]	10,000	[Igain]	90,000	620,000
Other assets	237,500	500,000					737,500
Intangible assets			[A]	240,000	[D]	30,000	210,000
Equity Investment	814,000		[Icogs]	14,000	[C]	12,714	-
			[Igain]	63,000	[E]	700,000
					[A]	178,286
Total Assets	2,129,500	1,250,000					2,624,500
Accounts Payable	100,000	50,000	[Ipay]	50,000			100,000
Other liabilities	300,000	150,000					450,000
Common Stock	1,000,000	500,000	[E]	500,000			1,000,000
Retained Earnings	729,500	550,000					729,500
Non-controlling Interest			[Igain]	27,000	[C]	10,286	345,000
	-	-			[E]	300,000
					[A]	61,714
Total Liabilities and Equity	2,129,500	1,250,000		1,728,000		1,728,000	2,624,500