A parent company acquired its 75% interest in its subsidiary on January 1, 2008.
ID: 2537989 • Letter: A
Question
A parent company acquired its 75% interest in its subsidiary on January 1, 2008. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $420,000 in excess of the book value of the subsidiary's Stockholders' Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary's financial statements (i.e, there is no Goodwill), The Royalty Agreement has a 7 year estimated remaining economic life on the acquisition date. Both companies use straight line depreciation and amortization, with no salvage value. In january 2011, the subsidiary sold Equipment to the parent for a cash price of $255,000. The subsidiary acquired the equipment at a cost of $480000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 6 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 4 year useful life. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2013. The parent uses the equity method to account for its Equity Investment Parent Subsidiay Parent Subsidiary Balance sheet Income statement: Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses $3,380,000 $p6,000 Assets (2,433,600) (525,600 Cash $684,595 $243,272 91,500376,680 878,800 481,800 3,400,280 902.280 946,480 350,400 Accounts receivable Inventory S0,355 (507,000) (227,760) PPE, net $489,755 122,640 Equity investment 443.156 Net income $5,998,331 $2,004,032 Statement of retained earnings: BOY retained earnings Net income Dividends EOY retained earnings $197,100 Liabilities and stockholders' equity 341.380 $155,928 402,220 201,480 1,500.0001,100,000 86,914 108,624 1,363,843 135,780 .203.974 302 220 489,755 122.640 Accounts payable (98.408)17.520) Other current labilities 2,203,974 $302 220 Long-term liabilities Common stock APIC Retained earningsExplanation / Answer
Unamortized AAP (A)
Amortization (B)
Unamortized AAP (A-B)
Amortization
Unamortized AAP
Amortization
Unamortized AAP
Amortization
Unamortized AAP
Amortization
Unamortized AAP
01-01-08
2008
01-01-09
2009
01-01-10
2010
01-01-11
2011
01-01-12
2012
01-01-13
Royalty agreement
420000
60000
360000
60000
300000
60000
240000
60000
180000
60000
120000
Controlling interests
Royalty agreement
315000
45000
270000
45000
225000
45000
180000
45000
135000
45000
90000
(75% of total)
Non-controlling interests
Royalty agreement
105000
15000
90000
15000
75000
15000
60000
15000
45000
15000
30000
(25% of Total)
Workings:
Amortization (Annual)
AAP
420000
Years of useful life
7
Salvage value
0
Depreciation method
SLM
Accordingly, annual amortization
60000
Unamortized AAP (A)
Amortization (B)
Unamortized AAP (A-B)
Amortization
Unamortized AAP
Amortization
Unamortized AAP
Amortization
Unamortized AAP
Amortization
Unamortized AAP
01-01-08
2008
01-01-09
2009
01-01-10
2010
01-01-11
2011
01-01-12
2012
01-01-13
Royalty agreement
420000
60000
360000
60000
300000
60000
240000
60000
180000
60000
120000
Controlling interests
Royalty agreement
315000
45000
270000
45000
225000
45000
180000
45000
135000
45000
90000
(75% of total)
Non-controlling interests
Royalty agreement
105000
15000
90000
15000
75000
15000
60000
15000
45000
15000
30000
(25% of Total)
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