Assignment Six

Answer the questions below as indicated. Upload the completed assignment to this link.

1-Assume a Legal Entity's capital structure consists of the following accounts:

Short-term note payable	$300,000
Long-term note payable	440,000
Mandatorily redeemable preferred stock	325,000
Common stock	70,000
Additional paid-in capital	385,000
Retained earnings	550,000
Total liabilities and equity	$1,790,000

Required:

What is the maximum amount of expected losses that the Legal Entity can expect to sustain without being considered a variable interest entity (VIE)?

2-Assume a Legal Entity's capital structure consists of the following accounts

General partner capital	$240,000
Limited partner capital	2,160,000
Total capital	$2,400,000

A Reporting Company is the sole general partner of the Legal Entity. The limited partnership capital was contributed by unaffiliated individual investors recruited by a regional boutique investment bank. The Reporting Company is paid an $180,000 management fee. The limited partners expect the partnership to be highly successful over the next five years. The investment bank estimated that the distribution of income to these investors should be at least $400,000 during the time period.

What is the maximum amount of expected losses that the Legal Entity can expect to sustain without being considered a variable interest entity (VIE)?

3-Assume that a Parent company owns 100% of its Subsidiary. On January 1, 2020 the Parent company had a $2,000,000 (face) bond payable outstanding with a carrying value of $2,140,000. The bond was originally issued to an unaffiliated company. On that same date, the Subsidiary acquired the bond for $1,992,000. During 2020, the Parent company reported $1,260,000 of (pre-consolidation) income from its own operations (i.e. prior to any equity method adjustments by the Parent company) and after recording interest expense. The Subsidiary reported $840,000 of (pre-consolidation) income from its own operations after recording interest income. Related to the bond during 2020, the parent reported interest expense of $220,000 while the subsidiary reported interest income of $190,000.

Required: Determine the following amounts that will appear in the 2020 consolidated income statements. a. Interest income from bond investment b. Interest expense on bond payable c. Gain (loss) on constructive retirement of bond payable d. Consolidated net income

4-Assume that a Parent company owns 80% of its Subsidiary. The Parent company uses the equity method to account for its Investment in Subsidiary. On January 1, 2019, the Parent company issued to an unaffiliated company $4,000,000 (face) 10 year, 10% bonds payable for a $260,000 premium. The bonds pay interest on December 31 of each year. On January 1, 2022, the Subsidiary acquired 30% of the bonds for $1,040,000.

Both companies use straight-line amortization.

In preparing the consolidated financial statements for the year ended December 31, 2023, what consolidating entry adjustment is necessary for the beginning-of-year Investment in Subsidiary account balance?

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1. 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.

6-Assume that a Parent company acquires a 60% interest in its Subsidiary on January 1, 2020. On the date of acquisition, the fair value of the 60% controlling interest was $1,440,000 and the fair value of the 40% noncontrolling interest was $960,000. On January 1, 2020, the book value of net assets equaled $2,400,000 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). The parent uses the equity method to account for its investment in the subsidiary.

On December 31, 2021, the Subsidiary company issued $3,000,000 (face) 5 percent, five-year bonds to an unaffiliated company for $2,760,436. The bonds pay interest annually on December 31, and the bond discount is amortized using the straight-line method. This results in annual bond-payable discount amortization equal to $47,913 per year.

On December 31, 2023, the Parent paid $3,081,698 to purchase all of the outstanding Subsidiary company bonds. The bond premium is amortized using the straight-line method, which results in annual bond-investment premium amortization equal to $27,233 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	91,398
Bond interest income	122,767
Bond interest expense		-197,913
Operating expenses	-230,000	-125,000
Net income	$644,165	$27,087

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	$4,000,000	$450,000
Net income	644,165	27,087
Dividends	-200,000	-25,000
EOY Retained Earnings	$4,444,165	$452,087

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	1,289,761
Investment in bonds	3,054,465
PPE, net	12,806,046	6,392,262
	$20,900,272	$8,192,262
Liabilities and Stockholders' Equity:
Accounts payable	$1,600,000	$838,000
Current Liabilities	2,200,000	1,100,000
Bonds payable		2,904,174
Long-term Liabilities	2,226,100	950,000
Common Stock	1,162,000	398,000
APIC	9,268,007	1,550,000
Retained Earnings	4,444,165	452,087
	$20,900,272	$8,192,262

Required:

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2022.

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