On January 1 2016 Aspen Company acquired 80 percent of Birch

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:

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?

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

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

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?

	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

Solution

a) Consideration transferred (by Aspen) $288,000 Noncontrolling interest fair value $72,000 Birch’s business fair value $360,000 Book value -$300,000 Trade name $60,000 Life 30 years Annual amortization = $60000/30 $2,000 Consideration transferred for Cedar (by Birch) $104,000 Noncontrolling interest fair value $26,000 Cedar’s business fair value $130,000 Book value -$100,000 Excess to trade name $30,000 Life 30 years Annual amortization = 30000/30 $1,000 Investment in Birch $288,000 Birch\'s reported income-2012 $40,000 Amortization expense -$2,000 Accrual-based income $38,000 Aspen’s percentage ownership 80.00% Equity accrual-2012 $30,400 Dividends received 2012 (-10000 x 80%) -$8,000 Birch\'s reported income-2013 $60,000 Amortization expense -$2,000 Income from Cedar [80% x (10000-1000] $7,200 Accrual-based income $65,200 Aspen’s percentage ownership 80.00% Equity accrual-2013 $52,160 Dividends received from Birch 2013 (20000 x 80%) -$16,000 Investment in Birch 12-31-13 $346,560 b) Consolidated sales(total for the companies) $1,298,000 Consolidated expenses (total for the companies) -$1,025,000 Total amortization expense (see a.) -$3,000 Consolidated net income for 2014 $270,000 c) Cedar’s NCI in consolidated net income Revenues less expenses $30,000 Excess amortization -$1,000 Accrual-based income $29,000 Noncontrolling interest percentage x20% Cedar’s NCI in consolidated net income $5,800 Birch\'s NCI in consolidated Net income Revenues less expenses $65,000 Excess amortization -$2,000 Equity in Cedar income [(42,400 – 1,200) × 80%] $23,200 Realized2014 income of Birch $86,200 Noncontrolling interest percentage x20% Birch’s NCI in consolidated net income $17,240 Total NCIshare of 2014 consolidated net income $23,040 d) 2013 Realized income of Birch (prior to accounting for unrealized gross profit) (see a) $65,200 2012 Transfer-gross profit recognized in 2013 $10,000 2013 Transfer-gross profit to be recognized in 2014 -$16,000 2013 Realized income - Birch $59,200 2014 Realized income of Birch (prior to accounting for unrealized gross profit) (part c) $86,200 2013 Transfer-gross profit recognized in 2014 16000 2014 Transfer-gross profit to be recognized in 2015 -25000 2014 Realized income—Birch $77,200