Question

On January 1, 2018, Ackerman sold equipment to Brannigan (a wholly owned subsidiary) for $190,000 in cash. The equipment had originally cost $171,000 but had a book value of only $104,500 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense is computed using the straight-line method.

Ackerman reported $470,000 in net income in 2018 (not including any investment income) while Brannigan reported $154,100. Ackerman attributed any excess acquisition-date fair value to Brannigan's unpatented technology, which was amortized at a rate of $5,700 per year.

1. What is consolidated net income for 2018?
2. What is the parent's share of consolidated net income for 2018 if Ackerman owns only 90 percent of Brannigan?
3. 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?
4. What is the consolidated net income for 2019 if Ackerman reports $490,000 (does not include investment income) and Brannigan $165,800 in income? Assume that Brannigan is a wholly owned subsidiary and the equipment transfer was downstream.

Answer 1

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a.	Net income—Ackerman		$     470,000
	Net income—Brannigan		$     154,100
	Excess amortization for unpatented technology		$       (5,700)
	Remove intra-entity gain on equipment ($104,500-$190,000)		$     (85,500)
	Remove excess depreciation created by inflated transfer price ($85,500÷5)		$       17,100
	Consolidated net income		$     550,000
b.	Net income calculated in (part a.)		$     550,000
	Net income attributable to non-controlling interest:
	Net income—Brannigan	$   154,100
	Excess amortization	$      (5,700)
	Adjusted net income	$   148,400
	NI attributable to the non-controlling interest	10%	$     (14,840)
	Consolidated net income to parent company		$     535,160
c.	Net income calculated in (part a.)		$     550,000
	NI attributable to non-controlling interest (see Schedule 1)		$       (8,000)
	Consolidated net income to parent company		$     542,000
	Schedule 1: Net income attributable to non-controlling interest
	Reported subsidiary net income		$     154,100
	Excess amortization		$       (5,700)
	Defer intra-entity gain on equipment transfer		$     (85,500)
	Eliminate excess depreciation ($85,500÷5)		$       17,100
	Brannigan's adjusted net income		$       80,000
	Outside ownership		10%
	Net income attributable to non-controlling interest		$          8,000
d.	Net income2019—Ackerman		$     490,000
	Net income2019—Brannigan		$     165,800
	Excess amortization		$       (5,700)
	Eliminate excess depreciation stemming from transfer (Next year)		$       17,100
	Consolidated net income		$     667,200