Question

On January 1, 2018, Ackerman sold equipment to Brannigan (a wholly owned subsidiary) for $360,000 in cash. The equipment had originally cost $324,000 but had a book value of only $198,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense is computed using the straight-line method. Ackerman reported $460,000 in net income in 2018 (not including any investment income) while Brannigan reported $150,800. Ackerman attributed any excess acquisition-date fair value to Brannigan's unpatented technology, which was amortized at a rate of $5,600 per year.

a. What is consolidated net income for 2018?

b. What is the parent's share of consolidated net income for 2018 if Ackerman owns only 90 percent of Brannigan?

c. What is the parent's share of consolidated net income for 2018 if Ackerman owns only 90 percent of Brannigan and the equipment transfer was upstream?

d. What is the consolidated net income for 2019 if Ackerman reports $480,000 (does not include investment income) and Brannigan $162,400 in income? Assume that Brannigan is a wholly owned subsidiary and the equipment transfer was downstream.

Answer 1

B 1 a) 2 460000 150800 -5600 -162000 32400 475600 3 Net income-Ackerman 4. Net income-Brannigan 5 Excess amortization for unpatented technology 6 Remove unrealized gain on equipment ($360000 – $198000) 7 Remove excess depreciation created by inflated transfer price ($162000: 5) | 8 Consolidated net income 9 10 b) 11 12 Net income calculated in (part a.) 13 Noncontrolling interest in consolidated net income 14 Net income—Brannigan 15 Excess amortization 16 Adjusted net income 17 Noncontrolling interest in consolidated net income 18 Consolidated net income to parent company 19 475600 150800 -5600 145200 10% -14520 461080

19 20 c) 21 22 Net income calculated in (part a.) 475600 -1560 474040 23 Noncontrolling interest in consolidated net income (see working note) 24 Consolidated net income to parent company 25 26 Working note: 27 28 Reported net income of subsidiary 29 Excess amortization 30 Defer unrealized gain on equipment transfer 31 Eliminate excess depreciation ($162000 = 5) 32 Brannigan realized net income 33 Outside ownership 34 Non controlling interest in consolidated income 35 150800 -5600 -162000 32400 15600 10% 1560

A 35 36 d) 37 38 Net income 2019-Ackerman 39 Net income 2019—Brannigan 40 Excess amortization for unpatented technology 480000 162400 -5600 41 Eliminate excess depreciation stemming from transfer ($162000 = 5) (year after transfer) 42 Consolidated net income 32400 669200 43 44