QUESTION 2

Consolidation worksheet for gain on constructive retirement of subsidiarys debt with no AAPCost 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 $1,080,000 and the fair value of the 10 percent noncontrolling interest was $120,000. On January 1, 2012, the book value of net assets equaled $1,200,000 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, 2012, the retained earnings of the subsidiary was $189,000.

On December 31, 2013, the Subsidiary company issued $1,125,000 (face) 7 percent, five-year bonds to an unaffiliated company for $1,222,413 (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 $19,483 per year. The following schedule provides the bond-amortization schedule from the initial issuance date.

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2016.

Round answers to the nearest whole number.

Year Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Cash Payment Amortization of (Prem) Disc. Interest Expense $78,750 78,750 78,750 78,750 78,750 $(19,483) (19,483) (19,483) (19,483) (19,483) $59,267 59,267 59,267 59,267 59,267 Carrying Amount $1,222,413 1,202,931 1,183,448 1,163,965 1,144,483 1,125,000 On December 31, 2015, the Parent paid $1,096,008 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 $9,664 per year. The following schedule provides the bond-amortization schedule for the Parent's bond investment. Year Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Cash Payment Amortization of (Prem) Disc. Interest Income $78,750 78,750 78,750 $9,664 9,664 9,664 $88,414 88,414 88,414 Carrying Amount $1,096,008 1105,672 1,115,336 1,125,000