Question

On January 1, 2012, Aspen Company acquired 80 percent of Birch Company’s outstanding voting stock for...

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.

  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   

  

What is the realized income of Birch in 2013 and 2014, respectively?

   

Homework Answers

Answer #1

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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