What journal entries explain the change in the total inventory accounts in 2009? You may assume that all labor and raw material purchases are paid in cash, all overhead is depreciation and there is no obsolescence. The inputs into work-in process are 60% raw materials, 25% overhead and 15% labor.

BALANCE SHEETS

At March 31, 2009

	2009	2008
Non-current assets
Property, plant and equipment	314	365
Construction in progress	47	51
Intangible assets	1853	1838
Available-for-sale securities	102	68
Other	205	172
	2521	2494
Current Assets
Inventories	450	472
Trade receivables, net	728	861
Other	746	1182
Cash and cash equivalents	1863	2191
	3787	4706
Total Assets	6308	7200
Share capital	1136	1180
Reserves	175	433
Total equity	1311	1613
Non-current liabilities	891	1098
Current liabilities
Trade payables	1991	2282
Provisions and accruals	1510	1945
Income Tax payable	89	87
Bank loans	20	61
Current portion of long-term debt	437	49
Other	59	65
	4106	4489
Total Liabilities	4997	5587
Total liabilities and equity	6308	7200

INCOME STATEMENT
For the year ended March 31, 2009
	2009
Sales	14901
Cost of sales	13160
Gross profit	1741
Selling, distribution and other expenses	-1103
Administrative expenses	-628
Research and development expense	-220
Operating loss	-210
Interest income	62
Interest expense	-40
Loss before taxes	-188
Taxation	-38
Loss for year	-226

CASH FLOW STATEMENT
For the year ended March 31, 2009
	2009
Cash flows from operating activities
Net income	-226
Depreciation and amortization	281
Gain/loss on sale of equipment and other assets	-1
Change in receivables	616
Change in inventories	26
Change in payables	-692
Other	-59
Net cash generated from operating activities	-55
Purchase of property, plant and equipment	-107
Proceeds from sales of property, plant and equipment	11
Construction of property, plant and equipment in process	-64
Purchases of intangible assets	-17
Proceeds from sales of securities available for sale	10
Net cash used in investing activities	-173
Exercise of share options	10
Repurchase of shares	-54
Dividends paid	-178
Increase in bank borrowings	122
Net cash used in financing activities	-100
Change in Cash	-328

footnotes: 2009 2008

Raw Materials 72 210

Work-in-process 109 57

Finished goods 269 205

Total 450 472

construction in progress 2009

beg year 51

add paid in cash 64

transfers to property-plANT EQUIP -68

END OF YEAR 47

QUESTION 14

Consolidation subsequent to date of acquisition—Equity method with noncontrolling interest , AAP and gain on upstream intercompany equipment sale

A parent company acquired its 75% interest in its subsidiary on January 1, 2011. On the acquisition date, the total fair value of the controlling interest and the noncontrolling interest was $350,000 in excess of the book value of the subsidiary’s Stockholders’ Equity. All of that excess was allocated to a Royalty Agreement, which had a zero book value in the subsidiary’s financial statements (i.e., there is no Goodwill). The Royalty Agreement has a 7 year estimated remaining economic life on the acquisition date. Both companies use straight line depreciation and amortization, with no salvage value.

In January 2014, the subsidiary sold Equipment to the parent for a cash price of $250,000. The subsidiary acquired the equipment at a cost of $480,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 6 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 4 year useful life.

Following are pre-consolidation financial statements of the parent and its subsidiary for the year ended December 31, 2016. The parent uses the equity method to account for its Equity Investment.

	Parent	Subsidiary			Parent	Subsidiary
Income statement:		Balance sheet:
Sales	$3,400,000	$900,000		Assets
Cost of goods sold	(2,400,000)	(500,000)		Cash	$619,500	$250,000
Gross profit	1,000,000	400,000		Accounts receivable	530,000	420,000
Income (loss) from subsidiary	85,875			Inventory	900,000	550,000
Operating expenses	(522,000)	(225,000)		PPE, net	3,500,000	1,000,000
Net income	$563,875	150,000		Equity investment	454,125
			$6,003,625	$2,220,000
Statement of retained earnings:
BOY retained earnings	$1,799,750	$200,000		Liabilities and stockholders’ equity
Net income	563,875	150,000		Accounts payable	$340,000	$250,000
				Other current liabilities	400,000	300,000
Dividends	(100,000)	(30,000)		Long-term liabilities	1,500,000	1,100,000
EOY retained earnings	$2,263,625	$320,000		Common stock	200,000	100,000
		APIC	1,300,000	150,000
		Retained earnings	2,263,625	320,000
			$6,003,625	$2,220,000

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP.

Do no enter any negative answers in part a.

	Unamortized		Unamortized		Unamortized		Unamortized		Unamortized		Unamortized		Unamortized
	AAP	2011	AAP	2012	AAP	2013	AAP	2014	AAP	2015	AAP	2016	AAP
	1/1/2011	Amortization	1/1/2012	Amortization	1/1/2013	Amortization	1/1/2014	Amortization	1/1/2015	Amortization	1/1/2016	Amortization	1/1/2017
Royalty agreement	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Controlling interest:
Royalty agreement	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Noncontrolling interest:
Royalty agreement	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer

b. Calculate and organize the profits and losses on intercompany transactions and balances.

Use negative signs with answers that are reductions.

	Downstream	Upstream
	Answer	Answer
Less:		Answer	Answer
	Answer	Answer

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders’ equity of the subsidiary.

Use negative signs with answers that are reductions.

Equity investment at 1/1/16:
Common stock	Answer
APIC	Answer
Retained earnings	Answer
	Answer
Less:		Answer
	Answer
Equity investment at 12/31/16:
Common stock	Answer
APIC	Answer
Retained earnings	Answer
	Answer
Less:		Answer
	Answer

d. Reconstruct the activity in the parent’s pre-consolidation Equity Investment T-account for the year of consolidation.

Equity Investment
Balance at 1/1/16	Answer	Answer
Net income	Answer	Answer	Dividends
	Answer	Answer
Balance at 12/31/16	Answer	Answer

e. Independently compute the owners’ equity attributable to the noncontrolling interest beginning and ending balances starting with the owners’ equity of the subsidiary.

Use negative signs with answers that are reductions.

Noncontrolling interest at 1/1/16:
Common stock	Answer
APIC	Answer
Retained earnings	Answer
	Answer
Less:		Answer
	Answer
Noncontrolling interest at 12/31/16:
Common stock	Answer
APIC	Answer
Retained earnings	Answer
	Answer
Less:		Answer
	Answer

f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income.

Use negative signs with answers that are reductions.

Consolidated:
Parent’s stand-alone net income	Answer
Subsidiary’s stand-alone net income	Answer
Plus:		Answer
Less:		Answer
Subsidiary’s adjusted stand-alone net income	Answer
Consolidated net income	Answer
Parent:
Parent’s stand-alone net income	Answer
75% Subsidiary’s stand-alone net income	Answer
Plus:		Answer
Less:		Answer
75% of subsidiary’s stand-alone net income	Answer
Consolidated net income attributable to the parent	Answer
Subsidiary:
25% of subsidiary’s stand-alone net income	Answer
Plus:		Answer
Less:		Answer
	Answer

g. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet.

Consolidation Worksheet
Description	Debit	Credit
[C]	Equity income	Answer	Answer
		Answer	Answer
	Dividends	Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
		Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[A]		Answer	Answer
	Equity investment	Answer	Answer
		Answer	Answer
[D]	Operating expenses	Answer	Answer
		Answer	Answer
[Igain]	Equity investment	Answer	Answer
		Answer	Answer
		Answer	Answer
[Idep]		Answer	Answer
		Answer	Answer