Topic: Consolidation Worksheet for Gain on Constructive Retirement of Subsidiarys Debt with no AAP 10 Points

LO: 2

Assume that a Temple company acquires a 90% interest in its Subsidiary Drexel on January 1, 2014. On the date of acquisition, the fair value of the 90% controlling interest was $1440000 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 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	-9500000	(1,040,000)
Gross Profit	3500000	560000
Equity investment income	70017
Bond interest income	117885
Bond interest expense		-79023
Operating expenses	-2300000	(360,000)
Net income	1387902	120,977

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	7,000,000	450,000
Net income	1387902	120977
Dividends	-370000	-40000
EOY Retained Earnings	8017902	530977

Balance Sheet
	Parent	Subsidiary
Assets:
Cash	1550000	1000000
Accounts receivable	2250000	1300000
Inventory	2300000	1686931
Equity Investment	1768804
Investment in bonds	1474229
PPE, net	13627000	2500000
	22970033	6486931
Liabilities and Stockholders Equity:
Accounts payable	1500000	956000
Current Liabilities	2000000	1200000
Bonds payable		1551954
Long-term Liabilities	2226131	900000
Common Stock	2106000	298000
APIC	7120000	1050000
Retained Earnings	8017902	530977
	22970033	6486931

Provide the consolidation entries for the year ended December 31, 2018.

Answer:

[C] Equity income from subsidiary*

Income attributable to noncontrolling interest

Dividends

Equity investment

Noncontrolling interest**

To eliminate inter-company income, investment and dividends.

[E] Common stock

APIC

Retained earnings

Equity Investment

Noncontrolling interest

To eliminate subsidiary's stockholders' equity.

EXTRA CREDIT Use the facts from Problem 11. 3 POINTS

[Ibond] Bond payable (net)

Interest income

Equity investment

Investment in bonds (net)

Interest expense