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	2015	2016	2017	2018	2019
Accounts Rec.	(4,000)	(4,000)	-	-	-	-
PPE, net	35,000	3,500	3,500	3,500	3,500	3,500
Patents	30,000	5,000	5,000	5,000	5,000	5,000
Notes payable	6,000	1,500	1,500	1,500	1,500	-
Goodwill	49,000	-	-	-	-	-
Net	116,000	6,000	10,000	10,000	10,000	8,500
100% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Accounts Rec.	(4,000)	-	-	-	-	-
PPE, net	35,000	31,500	28,000	24,500	21,000	17,500
Patents	30,000	25,000	20,000	15,000	10,000	5,000
Notes payable	6,000	4,500	3,000	1,500	-	-
Goodwill	49,000	49,000	49,000	49,000	49,000	49,000
Net	116,000	110,000	100,000	90,000	80,000	71,500

p% AAP Amortization		Amortized
	Allocation	2015	2016	2017	2018	2019
Accounts Rec.	(2,800)	(2,800)
PPE, net	24,500	2,450	2,450	2,450	2,450	2,450
Patents	21,000	3,500	3,500	3,500	3,500	3,500
Notes payable	4,200	1,050	1,050	1,050	1,050
Goodwill	34,950	-
Net	81,850	4,200	7,000	7,000	7,000	5,950
p% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Accounts Rec.	(2,800)	-	-	-
PPE, net	24,500	22,050	19,600	17,150	14,700	12,250
Patents	21,000	17,500	14,000	10,500	7,000	3,500
Notes payable	4,200	3,150	2,100	1,050	-	-
Goodwill	34,950	34,950	34,950	34,950	34,950	34,950
Net	81,850	77,650	70,650	63,650	56,650	50,700

nci% AAP Amortization		Amortized
	Allocation	2015	2016	2017	2018	2019
Accounts Rec.	(1,200)	(1,200)
PPE, net	10,500	1,050	1,050	1,050	1,050	1,050
Patents	9,000	1,500	1,500	1,500	1,500	1,500
Notes payable	1,800	450	450	450	450
Goodwill	14,050
Net	34,150	1,800	3,000	3,000	3,000	2,550
nci% Unamortized AAP		Unamortized
	Allocation	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Accounts Rec.	(1,200)	-	-	-	-	-
PPE, net	10,500	9,450	8,400	7,350	6,300	5,250
Patents	9,000	7,500	6,000	4,500	3,000	1,500
Notes payable	1,800	1,350	900	450	-	-
Goodwill	14,050	14,050	14,050	14,050	14,050	14,050
Net	34,150	32,350	29,350	26,350	23,350	20,800

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, 2018:     $90,000 − $60,000 = $30,000, 5-year remaining life

Profit confirmed each year: $30,000 / 5 = $6,000

	Downstream	Upstream
Net intercompany profit deferred at January 1, 2019	$24,000	$0
Less: Deferred intercompany profit recognized during 2019	(6,000)	0
Net intercompany profit deferred at December 31, 2019	$18,000	$0

Intercompany inventory transactions:

Intercompany inventory sales during 2019: $30,000

			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.

Investment at 1/1/2019 (Equity)
p% x book value of the net assets of subsidiary	294,000
Add: unamortized (p%) AAP	56,650
Deduct: Def. 100%*EOY D-S IIP	-
Deduct: Def. p%*EOY U-S IIP	(2,625)
Deduct: Def 100%*EOY D-S Asset Gain	(24,000)
Deduct: Def p%*EOY D-S Asset Gain	-
	324,025

Investment at 12/31/2019 (Equity)
p% x book value of the net assets of subsidiary	343,000
Add: unamortized (p%) AAP	50,700
Deduct: Def. 100%*EOY D-S IIP	(5,000)
Deduct: Def. p%*EOY U-S IIP	-
Deduct: Def 100%*EOY D-S Asset Gain	(18,000)
Deduct: Def p%*EOY U-S Asset Gain	-
	370,700

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.

p% of change in RE(S) from acquisition date through BOY		193,200
Less: Cum p% AAP amort. from acquisition date through BOY		(25,200)
Less: p% of the BOY U-S unconfirmed intercompany inventory profits		(2,625)
Less: 100% of the BOY D-S unconfirmed intercompany deprec. asset profits		(24,000)
[ADJ] Amount		141,375

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	126,000
Add: nci% unamortized AAP	23,350
Deduct: Def. nci%*EOY IIP	(1,125)
	148,225

NCI at 12/31/2019
nci% of book value of the net assets of subsidiary	147,000
Add: nci% unamortized AAP	20,800
	167,800

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	72,000
Plus: 100% realized downstream deferred profits	6,000
Less: 100% unrealized downstream deferred profits	(5,000)
Parent’s adjusted stand-alone net income	73,000
Subsidiary’s stand-alone net income	90,000
Plus: 100% realized upstream deferred profits	3,750
Less: 100% AAP amortization	(8,500)
Subsidiary’s adjusted stand-alone net income	85,250
Consolidated net income	158,250
Parent’s stand-alone net income	72,000
Plus: 100% realized downstream deferred profits	6,000
Less: 100% unrealized downstream deferred profits	(5,000)
Parent’s adjusted stand-alone net income	73,000
p% x subsidiary’s stand-alone net income	63,000
Plus: p% realized upstream deferred profits	2,625
Less: p% AAP amortization (from schedule)	(5,950)
p% of the Subsidiary’s adjusted stand-alone net income	59,675
Consolidated net income attributable to the CI	132,675
nci% x subsidiary’s stand-alone net income	27,000
Plus: nci% realized upstream deferred profits	1,125
Less: nci% AAP amortization (from schedule)	(2,550)
Consolidated net income attributable to the NCI	25,575

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		$\$141,375$
	Retained earnings of Parent - BOY			$\$141,375$
	[C] Equity income from subsidiary		$\$14,000$
	Income attributable to NCI		$\$25,575$
	Dividends			$\$19,575$
	Non-controlling interest			$\$20,000$
	(Eliminates the change in the investment account  of AAP adjusted changes in SE(S))
	[E]  Common Stock (S) @ BOY		$\$130,000$
	Retained Earnings (S) @BOY		$\$290,000$
	Equity Investment @BOY			$\$294,000$
	Non-controlling interest (@BOY)			$\$126,000$
	(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)		$\$21,000$
	Patents, net @ BOY (100% AAP)		$\$10,000$
	Goodwill		$\$49,000$
	Equity Investment @ BOY			$\$56,650$
	Non-controlling interest @ BOY			$\$23,350$
	(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		$\$8,500$
	Buildings and Equipment, net			$\$3,500$
	Patents			$\$5,000$
	(To record depreciation and amortization expense for the AAP assets)
	[Icogs] Equity investment @ BOY		$\$2,625$
	Non-controlling interest		$\$1,125$
	Cost of goods sold			$\$3,750$
	(Recognition of deferred gain on inventory sale and proration between parent and subsidiary)
	[Isales] Sales		$\$30,000$
	Cost of goods sold			$\$30,000$
	(Elimination of 100% of all intercompany transactions)
	[Icogs] Cost of goods sold		$\$5,000$
	Inventory			$\$5,000$
	(Deferral of gross profit on this year inventory sales)
	[Ipay] Accounts payable		$\$10,000$
	Accounts receivable			$\$10,000$
	(Elimination of intercompany receivable and payable)
	[Igain] Equity investment @ BOY		$\$24,000$
	Buildings and Equipment, net @ BOY			$\$24,000$
	[Idep] Buildings and Equipment, net		$\$6,000$
	Depreciation Expense			$\$6,000$

The consolidated spreadsheet is shown below:

	Parent	Subsidiary		Dr		Cr	Consol
Income Statement
Sales	500,000	260,000	[Isales]	30,000			730,000
Cost of Goods Sold	(280,000)	(125,000)	[Icogs]	5,000	[Icogs]	3,750	(376,250)
					[Isales]	30,000
Gross Profit	220,000	135,000					353,750
Depreciation & Amort Expense	(12,000)	(9,000)	[D]	8,500	[Idep]	6,000	(23,500)
Operating Expenses	(130,000)	(24,000)					(154,000)
Interest Expense	(6,000)	(12,000)					(18,000)
Total expenses	(148,000)	(45,000)					(195,500)
Income (loss) from Subsidiary	14,000	-	[C]	14,000			-
Consolidated Net Income	86,000	90,000					158,250
Consolidated NI attrib to NCI	-	-	[C]	25,575			(25,575)
Consolidated NI attrib to CI	86,000	90,000					132,675
Statement of Ret Earnings:
Beg. Ret. Earnings	575,000	290,000	[E]	290,000	[ADJ]	141,375	716,375
Consolidated NI attrib to CI	86,000	90,000					132,675
Dividends Declared	(60,000)	(20,000)			[C]	20,000	(60,000)
Ending Retained Earnings	601,000	360,000					789,050
Balance Sheet
Cash	160,000	20,000					180,000
Accounts receivable	200,000	50,000			[Ipay]	10,000	240,000
Inventories	340,000	80,000			[Icogs]	5,000	415,000
Buildings & Equipment, net	1,500,000	440,000	[A]	21,000	[D]	3,500	1,939,500
			[Idep]	6,000	[Igain]	24,000
Other assets	78,350	100,000					178,350
Patents	-	10,000	[A]	10,000	[D]	5,000	15,000
Equity Investment	182,650		[ADJ]	141,375	[E]	294,000	0
			[Icogs]	2,625	[A]	56,650
			[Igain]	24,000
Goodwill			[A]	49,000			49,000
Total Assets	2,461,000	700,000					3,016,850
Accounts Payable	460,000	22,000	[Ipay]	10,000			472,000
Notes Payable	1,000,000	158,000					1,158,000
Other liabilities	100,000	30,000					130,000
Common Stock	300,000	130,000	[E]	130,000			300,000
Retained Earnings	601,000	360,000					789,050
Non-controlling Interest	-	-	[Icogs]	1,125	[C]	19,575	167,800
					[E]	126,000
					[A]	23,350
Total Liabilities and Equity	2,461,000	700,000		768,200		768,200	3,016,850