5. Assume that, on January 1, 2011, a parent company acquired a 70% interest in

Question

5. Assume that, on January 1, 2011, a parent company acquired a 70% interest in its subsidiary for a purchase price that was $250,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date. The parent allocated the excess to the following [A] asset: [A] Asset PPE seful Life (years) 20 Initial Fair Value 250,000 Assume that the parent sells inventory to the subsidiary (downstream) which includes that inventory in products that it, ultimately, sells to customers outside of the controlled group. You have compiled the following data as of 2013 and 2014: 2013 $194,560 (145,560) $49,000 2014 Transfer price for inventory sale Cost of goods sold Gross profit % inventory remaining Gross profit deferred $266,800 (210,800) $56,000 35% $ 19,600 25% $ 12,250 EOY Receivable/Payable $ 20,000 $ 30,000 The inventory not remaining at the end of the year has been sold outside of the controlled group The parent and the subsidiary report the following financial statements at December 31, 2014: Income Statement Sales Cost of goods sold Gross Profit Equity investment income Operating expenses Net income Parent $ 5,430,000 (3,801,000) 1,629,000 275,709 (1,031,700) Subsidiary $1,277,300 (600,300) 677,000 (260,130)

Explanation / Answer

Solution:1

Equity Investment

BOY book value of stockholders’ equity)............466900 (516925+66700+83375)x 70%

BOY [A] assets ex GW...................................148750 [250000-(3*12500)] x 70%

BOY deferred profit...........................................(12250)100% since downstream

Equity Income [C]..........................................275709

Dividends (70%)..............................................(9805) 14007 x 70%

EOY Equity Investment.....................................869304

Solution:2

Beg. Bal Noncontrolling interests equity:

Stockholders'equity..............................................200100(516925+66700+83375)x 30%

[A] Assets...........................................................63750[250000 – (3 x 12500)] x 30%

Income [C]..........................................................121311 (416870-12500) X 30%

Dividends (30%)....................................................(4203) (14007x 30%)

Ending Balance NoncontrollingInterests...................380958

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