5. Assume that a Parent company acquires an 80% interest in its Subsidiary on January 1, 2020. On January 1, 2020, the book value of net assets 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). The parent uses the equity method to account for its investment in the subsidiary. On December 31, 2021, the Subsidiary company issued $1,000,000 (face) 6 percent, five-year bonds to an unaffiliated company for $1,085,379. 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 $17,076 per year. On December 31, 2023, the Parent paid $974,229 to purchase all of the outstanding Subsidiary company bonds. The bond discount is amortized using the straight-line method, which results in annual bond- investment discount amortization equal to $8,590 per year. The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2024: Income Statement Parent Subsidiary Sales $1,100,000 $800,000 Cost of goods sold -440,000 -450,000 Gross Profit 660,000 350,000 Income (loss) from subsidiary 119,995 Bond interest income 68,590 Bond interest expense -42,924 Operating expenses -230,000 -125,000 Net income $ 618,585 $182,076 Statement of Retained Earnings Parent Subsidiary. BOY Retained Earnings $4,000,000 $450,000 Net income 618,585 182,076 Dividends -200,000 -25,000 EOY Retained Earnings $4,418,585 $607,076 Balance Sheet Parent Subsidiary Assets: Cash $ 1,750,000 $ 800,000 Accounts receivable 800,000 750,000 Inventory 1,200,000 250,000 Equity Investment 2,095,393 Investment in bonds 982,819 PPE, net 14,046,480 4,677,227 $20,874,692 $6,477,227 Liabilities and Stockholders' Equity: Accounts payable $ 1,600,000 $ 838,000 Current Liabilities 2,200,000 1,100,000 Bonds payable 1,034,152 Long-term Liabilities 2,226,100 950,000 Common Stock 1,162,000 398,000 APIC 9,268,007 1,550,000 Retained Earnings 4,418,585 607,076 $20,874,692 $6,477,227 Required: Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2024. 5. Assume that a Parent company acquires an 80% interest in its Subsidiary on January 1, 2020. On January 1, 2020, the book value of net assets 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). The parent uses the equity method to account for its investment in the subsidiary. On December 31, 2021, the Subsidiary company issued $1,000,000 (face) 6 percent, five-year bonds to an unaffiliated company for $1,085,379. 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 $17,076 per year. On December 31, 2023, the Parent paid $974,229 to purchase all of the outstanding Subsidiary company bonds. The bond discount is amortized using the straight-line method, which results in annual bond- investment discount amortization equal to $8,590 per year. The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2024: Income Statement Parent Subsidiary Sales $1,100,000 $800,000 Cost of goods sold -440,000 -450,000 Gross Profit 660,000 350,000 Income (loss) from subsidiary 119,995 Bond interest income 68,590 Bond interest expense -42,924 Operating expenses -230,000 -125,000 Net income $ 618,585 $182,076 Statement of Retained Earnings Parent Subsidiary. BOY Retained Earnings $4,000,000 $450,000 Net income 618,585 182,076 Dividends -200,000 -25,000 EOY Retained Earnings $4,418,585 $607,076 Balance Sheet Parent Subsidiary Assets: Cash $ 1,750,000 $ 800,000 Accounts receivable 800,000 750,000 Inventory 1,200,000 250,000 Equity Investment 2,095,393 Investment in bonds 982,819 PPE, net 14,046,480 4,677,227 $20,874,692 $6,477,227 Liabilities and Stockholders' Equity: Accounts payable $ 1,600,000 $ 838,000 Current Liabilities 2,200,000 1,100,000 Bonds payable 1,034,152 Long-term Liabilities 2,226,100 950,000 Common Stock 1,162,000 398,000 APIC 9,268,007 1,550,000 Retained Earnings 4,418,585 607,076 $20,874,692 $6,477,227 Required: Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2024
