Fluent Essays

Complete two exercises in accounting for outside ownership (noncontrolling interest) and eliminating intercompany transactions, resulting in unrealized gains and losses. Introduction It is not necessary for a parent company to acquire all of a subsidiarys stock in order to form a business combination. In fact, when one company acquires control of a subsidiary company, the ownership interest of the parent company is sometimes less than 100 percent. All that is required in a combination is control over the decision-making process; this is usually achieved by acquiring a majority of the voting shares. Ownership of any subsidiary stock that is retained by outside, unrelated parties is called noncontrolling interest. A consolidation may become quite complex when there is noncontrolling interest. The involved subsidiary owners and their equity must be recognized by the parent company in its consolidated financial statements. The valuation of the subsidiarys assets and liabilities may also be a challenge with there is noncontrolling interest and the acquisition method is followed. Clearly, noncontrolling interest issues are often present, and a central issue is how the financial statements are presented for both entities. In Assessment 1, you analyzed the deferral and subsequent recognition of gains that were created by inventory transfers between two affiliated companies in connection with equity method accounting. In that case, intra-entity profits were not realized until the earning process culminated in a sale to an unrelated party. A similar process can be applied to transactions between companies within a business combination. Be mindful that sales within a single economic entity create neither profits nor losses. The opportunity for direct acquisition of assets (e.g., inventory) is often a reason for the creation of the business combination. Because the transaction was not made with an outside, unrelated party, the sales and purchases created by the transfer must be accounted for by accountants with each entity. This is true regardless of the asset, be it inventory, land, or depreciable assets. Preparation The following resources are required to complete the assessment. Assessment 2 Problems [DOCX]. Assessment 2 Problem Templates [DOCX]. Complete the problems in the Assessment 2 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided. In these problems you will: Determine consolidated balances. Calculate intra-entity transfer account balances. Competencies Measured By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria: Competency 1: Consolidate financial statement information. Calculate intra-entity transfer account balances. Competency 2: Evaluate the influence of global money markets on financial statements. Determine consolidated balances. Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting. Communicate results from accounting calculations accurately and clearly.Assessment 2 Problem Templates Problem 1 Determine consolidated balances. Acquisition date subsidiary fair value (given) Book value of subsidiary (given) Fair value in excess of book value Allocations to specific accounts based on difference between fair value and book value: Land Buildings and equipment Copyright Notes payable: Value Allocations Total Annual excess amortizations: Buildings and equipment Copyright Notes payable Total Consolidated Totals: · Revenues: · Cost of goods sold: · Depreciation expense: · Amortization expense: · Interest expense: · Equity in income of Sun: · Net income: · Retained earnings, 1/1: · Noncontrolling interest in income of subsidiary: · Dividends paid: · Retained earnings, 12/31: · Current assets: · Investment in Sun: · Land: · Buildings and equipment (net): · Copyright: · Total assets: · Accounts payable: · Notes payable: · Noncontrolling interest in subsidiary: · Common stock: · Additional paidin capital: · Retained earnings, 12/31: · Total liabilities and equities: Acquisition Method Accounts Prather Staffer Consolidation Debit Consolidation Credit Noncontrolling Interest Consolidated Totals Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Equity in income of Sun Separate company net income Consolidated net income Noncontrolling interest in Suns income Controlling interest in CNI Retained earnings 1/1 Net income (above) Dividends paid Retained earnings 12/31 Current assets Investment in Sun Land Buildings and equipment (net) Copyright Total assets Accounts payable Notes payable NCI in Sun 1/1 NCI in Sun 12/31 Common stock Additional paid-in capital Retained earnings 12/31(above) … Total liability and stockholders equity Answer the questions about Panther and Staffer here. 1 4Assessment 2: Consolidations Prather, Inc., buys 80 percent of the outstanding common stock of Sun Corporation on January 1, 2018, for $1,496,000 cash. At the acquisition date, Sun’s total fair value, including the noncontrolling interest, was assessed at $1,870,000 although Sun’s book value was only $1,320,000. Also, several individual items on Sun’s financial records had fair values that differed from their book values as follows. Note: Credits are indicated by parentheses. Book Value Fair Value Land $132,000 $495,000 Buildings and equipment (10-year remaining life) 605,000 550,000 Copyright (20-year life) 220,000 440,000 Notes payable (due in 8 years) (286,000) (264,000) For internal reporting purposes, Prather, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies. Using the acquisition method, determine consolidated balances for this business combination (through either individual computations or the use of a worksheet). Prather Sun Revenues $(2,992,000) $(1,188,000) Cost of goods sold 1,540,000 847,000 Depreciation expense 572,000 22,000 Amortization expense –0– 11,000 Interest expense 96,800 11,000 Equity in income of Sam (231,000) –0– Net income $(1,014,200) $(297,000) Retained earnings, 1/1/18. $(2,783,000) $(968,000) Net income (above) (1,014,200) (297,000) Dividends paid 572,000 143,000 Retained earnings, 12/31/18 $(3,225,200) $(1,122,000) Current assets $ 2,123,000 $1,161,600 Investment in Sam 1,612,600 –0– Land 642,400 132,000 Buildings and equipment (net) 1,929,400 583,000 Copyright –0– 209,000 Total assets $6,307,400 $2,085,600 Accounts payable $(420,200) $(325,600) Notes payable (1,012,000) (286,000) Common stock (660,000) (220,000) Additional paid-in capital (990,000) (132,000) Retained earnings (above) (3,225,200) (1,122,000) Total liabilities and equities $(6,307,400) $(2,085,600) Panther Corporation acquired 80 percent of the outstanding voting stock of Staffer Company on January 1, 2018, for $924,000 in cash and other consideration. At the acquisition date, Panther assessed Staffer’s identifiable assets and liabilities at a collective net fair value of $1,155,000 and the fair value of the 20 percent noncontrolling interest was $231,000. No excess fair value over book value amortization accompanied the acquisition. The following selected account balances are from the individual financial records of these two companies as of December 31, 2019: Panther Staffer Sales . $1,408,000 $792,000 Cost of goods sold 638,000 433,400 Operating expenses 330,000 231,000 Retained earnings, 1/1/19 1,628,000 396,000 Inventory