On January 1, 2012, Aspen Company acquired 80 percent of Birch Company\'s outsta
ID: 2611246 • Letter: O
Question
On January 1, 2012, Aspen Company acquired 80 percent of Birch Company's outstanding voting stock for $500,000. Birch reported a $490,000 book value and the fair value of the noncontrolling interest was $125,000 on that date. Also, on January 1, 2013, Birch acquired 80 percent of Cedar Company for $224,000 when Cedar had a $253,000 book value and the 20 percent noncontrolling interest was valued at $56,000. In each acquisition, the subsidiary's excess acquisition-date fair over book value was assigned to a trade name with a 30-year life. These companies report the following financial information. Investment income figures are not included. 2012 Sales: Aspen Company Birch Company Cedar Company S 637,500 650,000 $ 732,500 269,500 356,750 588,300 Not available 193,300 295,200 Expenses Aspen Company Birch Company Cedar Company Dividends declared Aspen Company Birch Company Cedar Compan S 402,500 $ 645,000 $577,500 215,000 286,000 510,000 Not available 182,000 260,000 5,000 Not available 20,000 $ 35,000 20,000 3,000 45,000 20,000 8,000 Assume that each of the following questions is independent: a. If all companies use the equity method for intermal reporting purposes, what is the December 31, 2013, balance in Aspen's Investment in Birch Company account? Answer is complete but not entirely correct. nvestment 628,365 b. What is the consolidated net income for this business combination for 2014? Answer is complete but not entirely correct. 261,433 c. What is the net income attributable to the noncontrolling interest in 2014 Answer is complete but not entirely correct. lling interests' share 26,775 d. Assume that Birch made intra-entity inventory transfers to Aspen that have resulted in the following unrealized gross profits at the end of each year: Amount 12/31/12 $13,000 23,300 30,200 Date 12/31/13 12/31/14 What is the realized income of Birch in 2013 and 2014, respectively? Answer is complete but not entirely correct. 2013 2014 Realized income $ 64,323 x $92,673Explanation / Answer
Part a)
The value of investment in Birch as on December 31, 2013 is calculated with the use of following table:
Investment in Birch
480,000
Birch's Reported Net Income – 2012 (262,250 – 205,000)
57,250
Less Annual Amortization Expense
3,500
Accrual Based Net Income (57,250 – 3,500)
53,750
Birch's Percentage Ownership
80%
Equity Accrual 2012 (53,750*80%)
43,000
Less Dividends Received 2012 (15000*80%)
12,000
Birch's Reported Net Income – 2013 (337,500 – 267,000)
70,500
Less Annual Amortization Expense
3,500
Net Income from Cedar [(233,800-219,000 – 1,500)*80%]
10,640
Accrual Based Net Income (70,500 – 3,500 + 10,640)
77,640
Birch's Percentage Ownership
80%
Equity Accrual 2012 (77,640*80%)
62,112
Less Dividends Received from Birch (15000*80%)
12,000
Value of Investment in Birch as on December 31, 2013
$561,112
______
Notes:
The annual amortization expense is calculated with the use of following tables:
Consideration Transferred by Aspen
480,000
Add Non-Controlling Interest Fair Value
120,000
Birch's Business Fair Value
600,000
Less Book Value
(495,000)
Excess to Trade Name (A)
$105,000
Life (B)
30
Annual Amortization (A/B)
$3,500
______
Consideration Transferred for Cedar By Birch
168,000
Add Non-Controlling Interest Fair Value
42,000
Birch's Business Fair Value
210,000
Less Book Value
(165,000)
Excess to Trade Name (C)
45,000
Life (D)
30
Annual Amortization (C/D)
$1,500
______
Part b)
The consolidated net income is calculated as follows:
Consolidated Sales for All Companies (850,000 + 607,300 + 251,600)
1,708,900
Less Consolidated Expenses for All Companies (690,000 + 520,000 + 219,000)
(1,429,000)
Annual Amortization (3,500 + 1,500)
5,000
Consolidated Net Income for 2014
$274,900
______
Part c)
The net income attributable to NCI is calculated with the use of following table:
Cedar's NCI in Consolidated Net Income:
Revenues Less Expenses (251,600 – 219,000)
32,600
Less Excess Amortization
(1,500)
Accrual Based Net Income (32,600 – 1,500)
31,100
NCI Percentage
20%
Cedar's NCI in Consolidated Net Income (31,100*20%)
$6,220
Birch's NCI in Consolidated Net Income:
Revenues Less Expenses (607,300 – 520,000)
87,300
Less Excess Amortization
(3,500)
Equity in Cedar Income (31,100*80%)
24,880
Realized 2014 Income of Birch
1,08,680
Outside Ownership (108,680*20%)
20%
21,736
Total NCI (6,220 + 21,736)
$27,956
______
Part d)
The realized income for 2013 and 2014 is calculated as follows:
2013 Realized Income of Birch Prior to Accounting for Unrealized Gross Profit
77,640
Add 2012 Transfer – Gross Profit Recognized in 2013
15,500
Less 2013 Transfer – Gross Profit Recognized to be Recognized in 2014
(16,700)
2013 Realized Net Income - Birch
$76,440
______
2014 Realized Income of Birch Prior to Accounting for Unrealized Gross Profit
108,680
Add 2013 Transfer – Gross Profit Recognized in 2014
16,700
Less 2014 Transfer – Gross Profit Recognized to be Recognized in 2015
(33,600)
2014 Realized Net Income – Birch
$91,780
Correct Answer
a.. Consideration transferred (by Aspen) ………………………………………… $550,000
Non-controlling interest fair value………………………………………………. $125,000
Birch’s business fair value ($550,000 + $125,000)…………………………. $675,000
Book Value …………………………………………………………………..($490,000)
Trade Name ………………………………………………………………….. $185,000
Life ………………………………………………………………….. 30 Years
Annual Amortization ………………………………………………………………….. $6,166.66
Consideration transferred (by Birch)...………………………………………… $224,000
Non-controlling interest fair value………………………………………………. $56,000
Cedar’s business fair value ($224,000 + $56,000)…………………………. $280,000
Book Value …………………………………………………………………..($253,000)
Trade Name ………………………………………………………………….. $27,000
Life ………………………………………………………………….. 30 Years
Annual Amortization ………………………………………………………………….. $900
Investment in Birch $550,000
Birch’s reported income-2012 (Sales – Expense) $54,500
Amortization expense ($6,166.66)
Accrual-based income $48,333.34
Aspen’s percentage ownership 80%
Equity Accrual-2012 $38,666.67
Dividends received-2012 (80% of dividends) ($4,000)
Birch’s reported income-2013 (Sales – Expense) $70,750
Amortization expense ($6,166.66)
Income from Cedar [80% x ($11,300 - $900)] $10,040
Accrual-based income $74,623.34
Aspen’s percentage ownership 80%
Equity Accrual-2013 $59,698.67
Dividends received from Birch 2013 (80% of dividends) ($16,000)
Investment in Birch 31-12-2013 $628,365.34
Note: Dividends paid by Cedar to Birch don’t affect Aspen’s investment account.
b.. Consolidated Sales (Sum of sales of all three companies for 2014) $1,616,000
Consolidated Expenses (Sum of expenses of all three companies for 2014) ($1,347,500)
Total Amortization Expense in 2014 ($6,166.66 + $900) ($7,066.66)
Consolidated Net Income for 2014 $261,433.34
c.. Non-controlling interest in income of Cedar for 2014:
Revenue less Expense $35,200
Excess Amortization ($900)
Accrual-base income $34,300
Non-controlling interest percentage 20%
Non-controlling interest in income of Cedar $6,860
Non-controlling interest in income of Birch:
Revenue less Expense $78,300
Excess Amortization ($6,166.66)
Equity in Cedar’s income [($35,200 - $900)*80%] $27,440
Accrual-base income $99,573.34
Non-controlling interest percentage 20%
Non-controlling interest in income of Birch $19,914.67
Net Income attributable to non-controlling interest $26,774.67
d.. Realized Net Income for Birch in 2013 prior to unrealized profit $74,623.34
(See section a for calculations)
2012 Transfer-gross profit recognized in 2013 $13,000
2013 Transfer-gross profit to be recognized in 2014 ($23,300)
2013 Realized net income – Birch $64,323.34
Realized Net Income for Birch in 2013 prior to unrealized profit $99,573.34
(See section c for calculations)
2013 Transfer-gross profit to be recognized in 2014 $23,300
2014 Transfer-gross profit to be recognized in 2015 ($30,200)
2013 Realized net income – Birch $92,673.34
Investment in Birch
480,000
Birch's Reported Net Income – 2012 (262,250 – 205,000)
57,250
Less Annual Amortization Expense
3,500
Accrual Based Net Income (57,250 – 3,500)
53,750
Birch's Percentage Ownership
80%
Equity Accrual 2012 (53,750*80%)
43,000
Less Dividends Received 2012 (15000*80%)
12,000
Birch's Reported Net Income – 2013 (337,500 – 267,000)
70,500
Less Annual Amortization Expense
3,500
Net Income from Cedar [(233,800-219,000 – 1,500)*80%]
10,640
Accrual Based Net Income (70,500 – 3,500 + 10,640)
77,640
Birch's Percentage Ownership
80%
Equity Accrual 2012 (77,640*80%)
62,112
Less Dividends Received from Birch (15000*80%)
12,000
Value of Investment in Birch as on December 31, 2013
$561,112
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