Consolidation procedures for constructive retirement of affiliate debt acquired from non-affiliate - Equity Method

Assume that on January 1, 2014, a Parent company issued to an unaffiliated company a 7-year, 10% bond with a par value of $500,000 for $450,000. Interest is paid annually on December 31. On December 31, 2015 an affiliated Subsidiary purchased $400,000 (face) of the bonds for $410,000. In addition, on January 1, 2016, the Subsidiary had common stock of $100,000 and retained earnings for $70,000. The Parent owns 90% of the Subsidiary, and it is consolidated by the parent as a voting interest entity. there is no acquisition accounting premium (AAP) associated with the Parent's investment in the Subsidiary. Both companies use the straight-line amortization of bond premiums and discounts. The Parent and Subsidiary reported the following (pre-consolidation) income from their own operations (i.e. prior to any equity method adjustments by the Parent company), but after recording interest income and interest expense:

	NI Parent	NI Subsidiary
2015	140,000	80,000
2016	160,000	100,000

The Subsidiary also declared and paid a $25,000 cash dividend in each year, 2015 and 2016. The Parent uses the equity method of pre-consolidation investment bookkeeping.

Required -

a. Compute the amount of gain or loss that must be recognized in the consolidated financial statements for the constructive retirement of debt. In what year is this gain or loss recognized?

b. Prepare the bond-related journal entries recorded in the pre-consolidation financial statements by each company for the year ended December 31, 2016.

c. For the year ended December 31, 2016, compute the controlling interest in consolidated net income and the noncontrolling interest in consolidated net income.

d. Prepare the consolidation entries for the year ended December 31, 2016.