Problem 6-44 (LO 6-3)

Pavin acquires all of Stablers outstanding shares on January 1, 2015, for $660,000 in cash. Of this amount, $50,000 was attributed to equipment with a 10-year remaining life and $60,000 was assigned to trademarks expensed over a 20-year period. Pavin applies the partial equity method so that income is accrued each period based solely on the earnings reported by the subsidiary.

On January 1, 2018, Pavin reports $500,000 in bonds outstanding with a carrying amount of $464,000. Stabler purchases half of these bonds on the open market for $241,000.

During 2018, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $160,000 was transferred at a price of $200,000. All but $30,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $53,000 for inventory shipped from Pavin during December.

The following financial figures are for the two companies for the year ending December 31, 2018. Dividends were both declared and paid during the current year.

	Pavin				Stabler
Revenues	$	(800,000	)		$	(545,000	)
Cost of goods sold		475,000				260,000
Expenses		145,000				178,500
Interest expensebonds		56,000				0
Interest incomebond investment		0				(24,000	)
Loss on extinguishment of bonds		0				0
Equity in Stablers income		(130,500	)			0
Net income	$	(254,500	)		$	(130,500	)
Retained earnings, 1/1/18	$	(365,000	)		$	(401,000	)
Net income		(254,500	)			(130,500	)
Dividends paid		175,000				97,000
Retained earnings, 12/31/18	$	(444,500	)		$	(434,500	)
Cash and receivables	$	237,000			$	55,000
Inventory		195,000				107,000
Investment in Stabler		684,500				0
Investment in Pavin bonds		0				245,000
Land, buildings, and equipment (net)		265,000				561,000
Trademarks		0				0
Total assets	$	1,381,500			$	968,000
Accounts payable	$	(128,000	)		$	(273,500	)
Bonds payable		(500,000	)			(120,000	)
Discount on bonds		20,000				0
Common stock		(329,000	)			(140,000	)
Retained earnings (above)		(444,500	)			(434,500	)
Total liabilities and stockholders equity	$	(1,381,500	)		$	(968,000	)

Note: Credits are indicated by parentheses.

Prepare a worksheet to produce consolidated balance

a. Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2018, because of these bonds? Assume that the parent is not applying the equity method.