Question

Preparing a consolidated income statement—Equity method with noncontrolling interest, AAP and upstream and downstream intercompany inventory profits
A parent company purchased a 70% controlling interest in its subsidiary several years ago. The aggregate fair value of the controlling and noncontrolling interest was $700,000 in excess of the subsidiary’s Stockholders’ Equity on the acquisition date. This excess was assigned to a building that was estimated to be undervalued by $400,000 and to an unrecorded patent valued at $300,000. The building asset is being depreciated over a 16-year period and the patent is being amortized over an 8-year period, both on the straight-line basis with no salvage value. During the current year, the parent and subsidiary reported a total of $1,200,000 of intercompany sales. At the beginning of the current year, there were $80,000 of upstream intercompany profits in the parent’s inventory. At the end of the current year, there were $120,000 of downstream intercompany profits in the subsidiary’s inventory. During the current year, the subsidiary declared and paid $160,000 of dividends. The parent company uses the equity method of pre-consolidation investment bookkeeping. Each company reports the following income statement for the current year:

	Parent	Subsidiary
Income statement:
Sales	$10,000,000	$2,000,000
Cost of goods sold	(6,800,000)	(1,200,000)
Gross profit	3,200,000	800,000
Income (loss) from subsidiary	74,250	-
Operating expenses	(1,800,000)	(540,000)
Net income	$1,474,250	$260,000

a. Compute the Income (loss) from subsidiary of $74,250 reported by the parent company in its preconsolidation income statement.

Do not use negative signs with your answers below.

Subsidiary's net income		Answer
AAP		Answer
Upstream sales		Answer
Adjusted subsidiary income		Answer
P % of interest	X	Answer	%
		Answer
Downstream sales		Answer
Income (loss) from subsidiary		Answer

b. Prepare the consolidated income statement for the current year.

Do not use negative signs with your answers below.

Consolidated Income Statement
Sales	Answer
Cost of goods sold	Answer
Gross profit	Answer
Operating expenses	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer
AnswerNet income attributable to noncontrolling interestsNet income attributable to the parentNet income	Answer

Answer 1

Amortization expense of AAP assets
	Cost	Life	Amortization Per Yr
	[a]	[b]	[a/b]
Building	400000	16	25000
Patent	300000	8	37500
	700000		62500

a	Subsidiary Net Income-a	260000
	AAP(b)	62500
	Upstream Sales (c)	80000
	Adjusted Susbsidiary Net Income [a-b+c]	277500
	P% of Interest	70%
		194250
	Downstream Sales	120000
	Income (Loss) from subsidiary (194250-120000)	74250

b)

	Consolidated
Income statement:
Sales (10,000,000 + 2,000,000 - 1,200,000)	$10,800,000
Cost of goods sold ( 6,800,000 + 1,200,000 - 80,000 + 120,000 - 1,200,000)	(6,840,000)
Gross profit	3,960,000
Operating expenses ( 1,800,000 + 540,000 + 62500)	(2,402,500)
Net income	$1,557,500
Net income attributable to noncontrolling interests ( 260,000 - 62500) * 30%	59,250
Net income attributable to the parent	1,498,250