ACC 405 Module 4 Project One Example

One Year Later: Consolidating a Composite Maple Company and Its 80 Percent Owned Sugarhouse

[Student Name]

Southern New Hampshire University

ACC 405: Advanced Accounting

Project One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

One Year Later: Consolidating a Composite Maple Company and Its 80 Percent Owned Sugarhouse

Introduction

The group took shape on the first day of the year, when the maple company paid $4,800,000 for its 80 percent of the sugarhouse and the family's remaining 20 percent was valued at $1,150,000. Module Two allocated the $2,750,000 excess of fair value over book value to land, buildings and evaporators, syrup inventory, customer relationships, a trade name and goodwill. This project consolidates the two companies at December 31, one year later. The parent uses the equity method on its own books. The goal is a consolidated income statement and equity section that report the group as a single economic entity, with the noncontrolling interest shown within equity (Financial Accounting Standards Board, 2007).

Amortization of the Fair Value Adjustments

Table 1. Excess Amortization, First Year

Subsidiary Income and Its Allocation

The sugarhouse reported revenue of $4,200,000, cost of goods sold of $2,480,000 and operating expenses of $1,100,000, for net income of $620,000. It declared dividends of $150,000. From the group's perspective, its income must be reduced by the $175,000 of amortization, because those costs arise from the fair values the group paid for.

Table 2. Allocation of Adjusted Subsidiary Income

Parent's Equity Method Entries

Under the equity method, the parent books $356,000 of equity in subsidiary earnings as an increase to its investment, and the $120,000 of dividends it is owed as a decrease. The investment account moves from $4,800,000 to $5,036,000. The parent's own revenue was $18,400,000, cost of goods sold $11,960,000 and operating expenses $4,350,000, including the $85,000 of acquisition costs; with $356,000 of equity income, its net income is $2,446,000.

Worksheet Eliminations

Table 3. Consolidation Worksheet Entries at December 31

Entry A debits cost of goods sold rather than inventory for the $60,000 step-up because the syrup has already been sold; recording it in inventory and then expensing it would give the same result in two steps. After the entries, the investment account is fully eliminated: $4,800,000 plus $356,000 less $120,000 equals $5,036,000, and entries S, A, I and D remove exactly that amount net.

Consolidated Income Statement

Table 4. Consolidated Income Statement

The parent's slice of consolidated income, $2,446,000, is the same figure the parent reached on its own books through the equity method, a match that confirms the worksheet is consistent. The noncontrolling interest's share is shown as an allocation of consolidated income, not as an expense.

The Minority's Balance at Year End

The noncontrolling interest began at its $1,150,000 acquisition-date fair value, increased by its $89,000 share of adjusted income and decreased by $30,000 of dividends, ending at $1,209,000. It appears in consolidated equity next to the parent's equity, because the minority owners have an ownership claim, not a creditor's claim, on the group's net assets (Hoyle et al., 2021).

Checks on the Worksheet

Three checks confirm that the worksheet is internally consistent. First, the investment account eliminates to zero, as shown above. Second, the parent's slice of consolidated income and its own equity method income agree at $2,446,000. Third, the minority's year-end balance of $1,209,000 can be rebuilt from three numbers: $1,150,000 at acquisition, $89,000 of income and $30,000 of dividends. A worksheet that passes all three can still contain classification errors, but it cannot contain a missing amortization or a misallocated dividend, the two errors most common in consolidation work. Hoyle et al. (2021) recommend running these checks before preparing any statement, because an error found after the statements are drafted usually has to be corrected in several places at once.

Interpreting the Results

The acquisition added $4.2 million of revenue but only $356,000 of income attributable to the parent in its first year, because $175,000 of fair value amortization fell into the year, $60,000 of it a one-time inventory charge. In the second year amortization falls to $115,000, so the acquisition's contribution should rise even without growth. Anyone setting the group's margin beside the parent's earlier years should note that the consolidated gross margin of 35.8 percent includes the inventory step-up and that the customer relationship amortization will continue for four more years (Fischer et al., 2016). The trade name and goodwill, by contrast, will stay on the consolidated balance sheet at their acquisition-date amounts unless an impairment test shows a decline, so the first year's charges overstate the long-run cost of the acquisition and understate the attention that impairment testing will require in later years.

Conclusion

One year after acquisition, consolidated net income is $2,535,000, with $89,000 attributable to the noncontrolling interest and $2,446,000 to the parent, matching the parent's equity method income. First-year amortization of $175,000 reduces the sugarhouse's contribution, and the noncontrolling interest ends the year at $1,209,000 within consolidated equity.

References

Financial Accounting Standards Board. (2007). Noncontrolling interests in consolidated financial statements (Statement of Financial Accounting Standards No. 160). Author.

Fischer, P. M., Tayler, W. J., & Cheng, R. H. (2016). Advanced accounting (12th ed.). Cengage Learning.

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2021). Advanced accounting (14th ed.). McGraw Hill.