Topic: Consolidation Worksheet for Gain on Constructive Retirement of Subsidiarys Debt with no AAP

Assume that a Parent company acquires a 90% interest in its Subsidiary on January 1, 2014. On the date of acquisition, the fair value of the 90% controlling interest was $1,440,000 and the fair value of the 10% noncontrolling interest was $160,000. On January 1, 2014, the book value of net assets equaled $1,600,000 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, 2015, the Subsidiary company issued $1,500,000 (face) 7 percent, five-year bonds to an unaffiliated company for $1,629,884 (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 $25,977 per year.

On December 31, 2017, the Parent paid $1,461,344 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 $12,885 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2018:

Income Statement
	Parent	Subsidiary
Sales	$13,000,000	$1,600,000
Cost of goods sold	(9,500,000)	(1,040,000)
Gross Profit	3,500,000	560,000
Equity investment income	70,017
Bond interest income	117,885
Bond interest expense		(79,023)
Operating expenses	(2,300,000)	(360,000)
Net income	$ 1,387,902	$ 120,977

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	$7,000,000	$450,000
Net income	1,387,902	120,977
Dividends	(370,000)	(40,000)
EOY Retained Earnings	$8,017,902	$530,977

Balance Sheet
	Parent	Subsidiary
Assets:
Cash	$ 1,550,000	$ 1,000,000
Accounts receivable	2,250,000	1,300,000
Inventory	2,300,000	1,686,931
Equity Investment	1,768,804
Investment in bonds	1,474,229
PPE, net	13,627,000	2,500,000
	$22,970,033	$6,486,931
Liabilities and Stockholders Equity:
Accounts payable	$ 1,500,000	$ 956,000
Current Liabilities	2,000,000	1,200,000
Bonds payable		1,551,954
Long-term Liabilities	2,226,131	900,000
Common Stock	2,106,000	298,000
APIC	7,120,000	1,050,000
Retained Earnings	8,017,902	530,977
	$22,970,033	$6,486,931

Required:

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2018.

Detail calculations!