# 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.