P7-6 Parent Purchases Subsidiary Bonds On December 31, 2013, Ken AO acquired 80 percent of Nuro AO for $8,000,000 when the total shareholders equity of Nuro AO was $10,000,000. Below is the trial balance information of both companies for the year ended December 31, 2014:

Debits Ken AO Nuro AO Cash $ 1,500 $ 2,000 Accounts receivable 3,640 1,900 Interest receivable 100 0 Inventory 1,600 1,800 Land 2,000 4,200 Equipment-net 2,100 1,100 Building-net 6,000 2,000 Investment in Nuro AO bonds 950 0 Investment in Nuro AO 8,000 0 Cost of sales 11,100 8,800 Interest expense 0 200 Other expenses 1,700 2,100 Dividends 500 800 Total $38,550 $24,900 Credits Accounts payable $2,400 $900 Interest payable 0 100 10% bonds payable 0 900 Common stock 10,000 5,000 Retained Earnings 12,000 5,000 Sales 14,000 12,000 Gain on sale of building 0 1,000 Interest income 150 0 Total $38,550 $24,900 Intercompany Profit Transactions—Bonds 269 ADDITIONAL INFORMATION 1. During 2014, Nuro AO sold inventory to Ken AO for $1,000,000 with gross profit of 20%. Half of this inventory remained at Ken AO.

2. On July 1, 2014, Ken AO purchased a building from Nuro AO by paying $5,000,000 cash. The building had useful life of 10 years. Ken AO depreciated the building using straight-line method. Right before the sale, Nuro AO recorded the building on its book for $4,000,000.

3. On January 1, 2014, Nuro AO had $1,000,000 par of 10 percent bonds with unamortized discount of

$200,000. These bonds matured on January 1, 2016. The bonds pay interest every January 1. At this date, Ken AO purchased all of Nuro AO’s bonds with a price of $900,000.

REQuIRED: Prepare consolidation workpapers for Ken AO and Subsidiary for the year ended December 31, 2014.