11.Assume that a Parent company acquires a 80% interest in its Subsidiary on January 1, 2012.On the date of acquisition, the fair value of the 80% controlling interest was $416,000 and the fair value of the 20% noncontrolling interest was $104,000.On January 1, 2012, the book value of net assets equaled $520,000 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, 2013, the Subsidiary company issued $400,000 (face) 6 percent, five-year bonds to an unaffiliated company for $426,340 (i.e. the bonds had an effective yield of 4.5 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 $5,268 per year.

On December 31, 2015, the Parent paid $389,503 to purchase all of the outstanding Subsidiary company bonds (i.e. the bonds had an effective yield of 7 percent).The bond discount is amortized using the straight-line method, which results in annual bond-investment discount amortization equal to $3,499 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2016:15 Points

Income Statement

Parent

Subsidiary

Sales

$8,000,000

$850,000

Cost of goods sold

(6,000,000)

(530,000)

Gross Profit

2,000,000

320,000

Equity investment income

109,232

Bond interest income

27,499

Bond interest expense

(18,732)

Operating expenses

(1,200,000)

(200,000)

Net income

$890,500

$147,499

Statement of Retained Earnings

Parent

Subsidiary

BOY Retained Earnings

$5,741,500

$225,000

Net income

890,500

147,499

Dividends

(284,000)

(20,000)

EOY Retained Earnings

$6,348,000

$352,400

Balance Sheet

Parent

Subsidiary

Assets:

Cash

$800,000

$350,000

Accounts receivable

1,500,000

450,000

Inventory

2,000,000

550,000

Equity Investment

555,533

Investment in bonds

393,002

PPE, net

8,240,000

950,000

$13,095,533

$2,693,002

Liabilities and Stockholders' Equity:

Accounts payable

$700,000

$478,000

Current Liabilities

850,000

500,000

Bonds payable

410,536

Long-term Liabilities

836,997

1.042,503

Common Stock

450,000

150,000

APIC

3,500,000

170,000

Retained Earnings

6,348,000

352,499

$13.095,533

$2,693,002

Consolidation entries:

Dr

Cr

[C]

Equity Income from Subsidiary

Income attributable to NCI

Dividends - Subsidiary (common)

Investment in Subsidiary

Noncontrolling Interest

[E]

Common Stock (S) @ BOY

APIC

Retained Earnings (S) @ BOY

Investment in Subsidiary @ BOY

Noncontrolling interest @ BOY

[I_bond]

Bond payable (net)

Interest income

Investment in Bonds (net)

Interest expense

BOY Investment in Subsidiary