On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for $392,000. Birch reported a $355,000 book value and the fair value of the noncontrolling interest was $98,000 on that date. Also, on January 1, 2013, Birch acquired 80 percent of Cedar Company for $228,000 when Cedar had a $204,000 book value and the 20 percent noncontrolling interest was valued at $57,000. In each acquisition, the subsidiary’s excess acquisition-date fair over book value was assigned to a trade name with a 30-year life.
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These companies report the following financial information. Investment income figures are not included. |
| 2012 | 2013 | 2014 | ||||
| Sales: | ||||||
| Aspen Company | $ 500,000 | $ | 750,000 | $ | 825,000 | |
| Birch Company | 251,500 | 343,250 | 627,900 | |||
| Cedar Company | Not available | 164,900 | 246,800 | |||
| Expenses: | ||||||
| Aspen Company | $ 465,000 | $ | 567,500 | $ | 632,500 | |
| Birch Company | 199,000 | 282,000 | 555,000 | |||
| Cedar Company | Not available | 152,000 | 205,000 | |||
| Dividends declared: | ||||||
| Aspen Company | $ 10,000 | $ | 30,000 | $ | 40,000 | |
| Birch Company | 15,000 | 20,000 | 20,000 | |||
| Cedar Company | Not available | 4,000 | 12,000 | |||
| Assume that each of the following questions is independent: |
| a. | If all companies use the equity method for internal reporting purposes, what is the December 31, 2013, balance in Aspen's Investment in Birch Company account? |
| b. | What is the consolidated net income for this business combination for 2014? |
| c. | What is the net income attributable to the noncontrolling interest in 2014? |
| d. | Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following unrealized gross profits at the end of each year: |
| Date | Amount |
| 12/31/12 | $11,500 |
| 12/31/13 | 21,700 |
| 12/31/14 | 28,800 |
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What is the realized income of Birch in 2013 and 2014, respectively? |
a. Consideration transferred (by Aspen) .............................. $392,000
Noncontrolling interest fair value ...................................... 98,000
Birch’s business fair value................................................... 490,000
Book value ....................................................................... (355,000)
Trade name.............................................................................. $135,000
Life ............................................................................................ 30 years
Annual amortization .............................................................. $4,500
Consideration transferred for Cedar (by Birch) ............. $228,000
Noncontrolling interest fair value ...................................... 57,000
Cedar’s business fair value ................................................. $285,000
Book value ....................................................................... (204,000)
Trade name.............................................................................. $81,000
Life ............................................................................................ 30 years
Annual amortization .............................................................. $2,700
Investment in Birch $392,000
Birch's reported income-2012 $52,500
Amortization expense (4,500)
Accrual-based income $48,000
Birch’s percentage ownership 80%
Equity accrual-2012 $38,400
Dividends received 2012 (12,000)
Birch's reported income-2013 $61,250
Amortization expense (4,500)
Income from Cedar [80% x ($12,900 - $2,700)] 8,160
Accrual-based income $64,910
Birch’s percentage ownership 80%
Equity accrual-2013 $51,928
Dividends received from Birch 2013 (16,000)
Investment in Birch 12-31-13 $454,328
Note: Dividends paid by Cedar to Birch do not affect Aspen’s Investment account.
b. Consolidated sales (total for the companies) $1,699,700
Consolidated expenses (total for the companies) (1,392,500)
Total amortization expense (see a.) (7,200)
Consolidated net income for 2014 $ 300,000
c. Noncontrolling interest in income of Cedar
Revenues less expenses $41,800
Excess amortization (2,700)
Accrual-based income $39,100
Noncontrolling interest percentage 20%
Noncontrolling interest in income of Cedar $7,820
Noncontrolling interest in income of Birch:
Revenues less expenses $72,900
Excess amortization (4,500)
Equity in Cedar income [(41,800-2,700) × 80%] 31,280
Realized income of Birch—2014 $99,680
Outside ownership 20% $19,936
NCI share of 2014 consolidated income $27,756
d. 2013 Realized income of Birch (prior to accounting
for unrealized gross profit) (see a) $64,910
2012 Transfer-gross profit recognized in 2013 11,500
2013 Transfer-gross profit to be recognized in 2014 (21,700)
2013 Realized income - Birch $54,710
2014 Realized income of Birch (prior to accounting
for unrealized gross profit) (see c.) $99,680
2013 Transfer-gross profit recognized in 2014 21,700
2014 Transfer-gross profit to be recognized in 2015 (28,800)
2014 Realized income—Birch $92,580
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