Question

On January 1, 2016, Aspen Company acquired 80 percent of Birch Company's voting stock for $288,000. Birch reported a $300,000 book value and the fair value of the noncontrolling interest was $72,000 on that date. Then, on January 1, 2017, Birch acquired 80 percent of Cedar Company for $104,000 when Cedar had a $100,000 book value and the 20 percent noncontrolling interest was valued at $26,000. In each acquisition, the subsidiary's excess acquisition-date fair over book value was assigned to a trade name with a 30-year remaining life.

 

These companies report the following financial information. Investment income figures are not included.   

 

	2016		2017		2018
Sales:
Aspen Company	$	415,000	$	545,000	$	688,000
Birch Company		200,000		280,000		400,000
Cedar Company	Not available			160,000		210,000
Expenses:
Aspen Company	$	310,000	$	420,000	$	510,000
Birch Company		160,000		220,000		335,000
Cedar Company	Not available			150,000		180,000
Dividends declared:
Aspen Company	$	20,000	$	40,000	$	50,000
Birch Company		10,000		20,000		20,000
Cedar Company	Not available			2,000		10,000

 

Assume that each of the following questions is independent:

 

1. If all companies use the equity method for internal reporting purposes, what is the December 31, 2017, balance in Aspen's Investment in Birch Company account?

2. What is the consolidated net income for this business combination for 2018?

3. What is the net income attributable to the noncontrolling interest in 2018?

4. Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following intra-entity gross profits in inventory at the end of each year:

 

Date	Amount
12/31/16	$10,000
12/31/17	16,000
12/31/18	25,000

 

What is the accrual-based net income of Birch in 2017 and 2018, respectively?

 

Answer 1

Consolidated Financial Statements

Consolidated Financial Statements are statements of a group of companies where the parent as well as subsidiary companies assets, liabilities and equities are accounted together as a single entity. It is different from combined financial statements. Consolidated financial statements have a parent company who have controlling interest over its subsidiaries whereas combined financial statements does have a company that has controlling power over other companies.

Non-Controlling Interest

Non-controlling interest is that portion of a subsidiary’s total equity that is not attributable to the parent company. Here, the parent company has control over the subsidiary for more than 50% but less than 100%.

Unrealized Profit Inventory

Unrealized Profit is profit that is earned but not yet realized for an asset whose value has increased but is still in inventory of the company. This profit is not taxable and is termed as book profit or paper gain.

A company has acquired 80 percent of Company B for $288,000. Company B reported $300,000 book value and fair value of non-controlling interest was $72,000. On January 1, 2017, company B acquired 80 percent of company C for $104,000. Company C reported $100,000 book value and fair value of non-controlling interest was $26,000. This was assigned to 30-year life of the companies. The sales, expenses and dividends that were declared by the company for 3 years are presented. The questions that are independent of each other is answered below-

Annual Amortization for both companies is calculated below-

a. Equity Method of Reporting-

The investment balance as on 31^st December, 2017 was .

b. Consolidated Net Income for the year 2018-

c. Net Income attributable to Non-controlling Interest for the year 2018-

d. Realized income of Company B for 2017 and 2018 is calculated below-

Working Note-

Realized Income of Company B for the year 2018 is calculated as