Consolidation worksheet for gain on constructive retirement of subsidiary$$s debt with no AAP$$Cost method

Assume that a Parent company acquires a $75$ percent interest in its Subsidiary on January $1,2018.$ On the date of acquisition, the fair value of the $75$ percent controlling interest was $$480,000$ and the fair value of the $25$ percent noncontrolling interest was $$160,000.$ On January $1,2018,$ the book value of net assets equaled $$640,000$ and the fair value of the identifiable net assets equaled the book value of identifiable net assets $($i$.$e$.,$ there was no AAP or Goodwill$).$ On January $1,2018,$ the retained earnings of the subsidiary was $$120,000.$

On December $31,2019,$ the Subsidiary company issued $$600,000($face$)6$ percent, five$-$year bonds to an unaffiliated company for $$612,000.$ 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 $$2,400$ per year. The following schedule provides the bond$-$amortization schedule from the initial issuance date.

Year Cash Payment Amortization of Premium Interest Expense Carrying Amount

Dec. $31,2019$ $$612,000$

Dec. $31,2020$ $$36,000$ $$2,400$ $$33,600609,600$

Dec. $31,202136,0002,40033,600607,200$

Dec. $31,202236,0002,40033,600604,800$

Dec. $31,202336,0002,40033,600602,400$

Dec. $31,202436,0002,40033,600600,000$

On December $31,2021,$ the Parent paid $$588,000$ to purchase all of the outstanding Subsidiary company bonds. The bond discount is amortized using the straight$-$line method, which results in annual bond$-$investment discount amortization equal to $$4,000$ per year. The following schedule provides the bond$-$amortization schedule for the Parent$$s bond investment.

Year Cash Payment Amortization of Discount Interest Income Carrying Amount

Dec. $31,2021$ $$588,000$

Dec. $31,2022$ $$36,000$ $$4,000$ $$40,000592,000$

Dec. $31,202336,0004,00040,000596,000$

Dec. $31,202436,0004,00040,000600,000$

The parent uses the cost method of pre$-$consolidation investment bookkeeping. The Parent and the Subsidiary report the following financial statements for the year ended December $31,2022$:

Parent Subsidiary Parent Subsidiary

Income statement Balance sheet

Sales $$5,200,000$ $$640,000$ Assets

Cost of goods sold $(3,600,000)(360,000)$ Cash $$560,000$ $$240,000$

Gross profit $1,600,000280,000$ Accounts receivable $640,000400,000$

Operating and other expenses $(1,200,000)(160,000)$ Inventories $800,000640,000$

Bond interest income $40,000-$ PPE, net $2,400,0001,000,000$

Bond interest expense $-(33,600)$ Equity investment $480,000-$

Total expenses $(1,160,000)(193,600)$ Investment in bond, net $592,000-$

Income from subsidiary $24,000-$ $$5,472,000$ $$2,280,000$

Net income $$464,000$ $$86,400$ Liabilities and stockholders' equity

Statement of retained earnings Accounts payable $$640,000$ $$200,000$

BOY retained earnings $$608,000$ $$220,800$ Other current liabilities $720,000320,000$

Net income $464,00086,400$ Bond payable $($net$)-604,800$

Dividends $(160,000)(32,000)$ Other long$-$term liabilities $1,120,000360,000$

Ending retained earnings $$912,000$ $$275,200$ Common stock $480,000120,000$

APIC $1,600,000400,000$

Retained earnings $912,000275,200$

$5,472,0002,280,000$