Chapter 6 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: 16 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 $352,400Balance 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 $2,693,002Required: Prepare the Consolidation Entries. Consolidation entries: Dr Cr [C] [E] [!bond] 4. How do Cell Phones get Around? Answer: 5. What did the egg say to the frying pan