QUESTION 1

Consolidation worksheet for gain on constructive retirement of subsidiarys debt with no AAPEquity method Assume that a Parent company acquires a 90% interest in its Subsidiary on January 1, 2012. On the date of acquisition, the fair value of the 90 percent controlling interest was $720,000 and the fair value of the 10 percent noncontrolling interest was $80,000. On January 1, 2012, the book value of net assets equaled $800,000 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 $750,000 (face) 7 percent, five-year bonds to an unaffiliated company for $814,942 (i.e., the bonds had an effective yield of 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 $12,988 per year.

On December 31, 2015, the Parent paid $730,672 to purchase all of the outstanding Subsidiary company bonds (i.e., the bonds had an effective yield of 8 percent). The bond discount is amortized using the straight-line method, which results in annual bond-investment discount amortization equal to $6,443 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2016:

Parent Subsidiary Parent Subsidiary Balance sheet Income statement Sales Cost of goods sold Gross proft Equity income Bond interest income Bond interest expense Operating expenses $6,500,000 $800,000 Assets (4,750,000) (520,000) Cash $775,000 $500,000 1,125,000 650,000 1,150,000 843,465 6,813,500 1,250,000 1,750,000 280,000 Accounts receivable 35,008 Inventory 58,943 PPE, net (39,512) Equity investment 884,402 (1,150,000) (180,000) Investment in bonds 737,114 Net income $693,951 $60,488 $11,485,016 $3,243,465 Statement of retained earnings BOY retained earnings Net income Liabilities and stockholders' equity $750,000 $478,000 1,000,000 600,000 775,977 1,113,065 450,000 1,053,000 149,000 3,560,000 525,000 4,008,951 265,488 11,485,016 3,243,465 $3,500,000 $225,000 Accounts payable 693,951 60,488 Curent liabilities (185,000) (20,000) Bonds payable 4,008,95 $265,488 Long.term liabilities Dividends Ending retained earnings Common stock APIC Retained earnings Parent Subsidiary Parent Subsidiary Balance sheet Income statement Sales Cost of goods sold Gross proft Equity income Bond interest income Bond interest expense Operating expenses $6,500,000 $800,000 Assets (4,750,000) (520,000) Cash $775,000 $500,000 1,125,000 650,000 1,150,000 843,465 6,813,500 1,250,000 1,750,000 280,000 Accounts receivable 35,008 Inventory 58,943 PPE, net (39,512) Equity investment 884,402 (1,150,000) (180,000) Investment in bonds 737,114 Net income $693,951 $60,488 $11,485,016 $3,243,465 Statement of retained earnings BOY retained earnings Net income Liabilities and stockholders' equity $750,000 $478,000 1,000,000 600,000 775,977 1,113,065 450,000 1,053,000 149,000 3,560,000 525,000 4,008,951 265,488 11,485,016 3,243,465 $3,500,000 $225,000 Accounts payable 693,951 60,488 Curent liabilities (185,000) (20,000) Bonds payable 4,008,95 $265,488 Long.term liabilities Dividends Ending retained earnings Common stock APIC Retained earnings