problems topic consolidation worksheet for gain on constructive retirement of subsid 4314343

problems topic consolidation worksheet for gain on constructive retirement of subsid 4314343

Problems

Topic:Consolidation Worksheet for Gain on Constructive Retirement of Subsidiary’s Debt with no AAP

LO: 2

  1. Assume that a Parent company acquires a 90% interest in its Subsidiary on January 1, 2014.  On the date of acquisition, the fair value of the 90% controlling interest was $1,440,000 and the fair value of the 10% noncontrolling interest was $160,000.  On January 1, 2014, the book value of net assets equaled $1,600,000 and the fair value of the identifiable net assets equaled the book value of identifiable net assets (i.e. there was no AAP or Goodwill).

On December 31, 2015, the Subsidiary company issued $1,500,000 (face) 7 percent, five-year bonds to an unaffiliated company for $1,629,884 (i.e. the bonds had an effective yield of 5 percent).  The bonds pay interest annually on December 31, and the bond premium is amortized using the straight-line method.  This results in annual bond-payable premium amortization equal to $25,977 per year.

On December 31, 2017, the Parent paid $1,461,344 to purchase all of the outstanding Subsidiary company bonds (i.e. the bonds had an effective yield of 8 percent).  The bond discount is amortized using the straight-line method, which results in annual bond-investment discount amortization equal to $12,885 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2018:

Income Statement

Parent

Subsidiary

Sales

$13,000,000

$1,600,000

Cost of goods sold

(9,500,000)

(1,040,000)

Gross Profit

3,500,000

560,000

Equity investment income

70,017

Bond interest income

117,885

Bond interest expense

  (79,023)

Operating expenses

(2,300,000)

(360,000)

Net income

$1,387,902

$ 120,977

Statement of Retained Earnings

Parent

Subsidiary

BOY Retained Earnings

$7,000,000

$450,000

Net income

1,387,902

120,977

Dividends

    (370,000)

   (40,000)

EOY Retained Earnings

$8,017,902

$530,977

Balance Sheet

Parent

Subsidiary

Assets:

Cash

$   1,550,000

$   1,000,000

Accounts receivable

2,250,000

1,300,000

Inventory

2,300,000

1,686,931

Equity Investment

1,768,804

Investment in bonds

1,474,229

PPE, net

13,627,000

2,500,000

$22,970,033

$6,486,931

Liabilities and Stockholders’ Equity:

Accounts payable

$  1,500,000

$   956,000

Current Liabilities

2,000,000

1,200,000

Bonds payable

1,551,954

Long-term Liabilities

2,226,131

900,000

Common Stock

2,106,000

298,000

APIC

7,120,000

1,050,000

Retained Earnings

8,017,902

530,977

$22,970,033

$6,486,931

Required: 

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2018.

 

 

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